Tag: conventional loans

The 20% Down Myth That’s Keeping Buyers on the Sidelines

You’ve done the math. You found the perfect neighborhood. You know what you can afford comfortably every month. But then you look at your savings account, divide it by the home prices you are seeing, and decide you are still two years away from buying.

Because you don’t have 20% down.

This is one of the most common—and most damaging—myths in real estate today. Buyers sit on the sidelines for years, paying rent and watching home prices rise, convinced they aren’t “ready” simply because they haven’t saved a massive down payment.

Here is the truth: You probably don’t need 20% down.

1. THE REALITY OF MODERN FINANCING

The idea that you need 20% down is a holdover from a different era of banking. Today, lenders offer a variety of programs designed to get qualified buyers into homes without draining their entire life savings.

  • FHA Loans: Allow down payments as low as 3.5%. These are incredibly popular for first-time buyers and offer flexible credit requirements.

  • Conventional Loans: Can often be secured with just 3% to 5% down, depending on your financial profile and the specific loan product.

  • VA and USDA Loans: Offer 0% down options for eligible buyers, such as veterans, active-duty military, and those purchasing in designated rural areas.

If you have a solid credit score and stable income, there are almost certainly options available to you right now.

2. THE COST OF WAITING

When you delay buying to save that 20%, you are trying to outpace a moving target. Let’s look at the math: If you are eyeing a $400,000 home and prices rise by just 5% in a year, that same home will cost $420,000 next year. Not only did the price go up by $20,000, but the amount you need for a 20% down payment just increased from $80,000 to $84,000.

Worse, by sitting on the sidelines, you completely miss out on the equity growth and wealth-building you would have gained by simply owning the home during those years.

3. WHAT ABOUT PMI?

The biggest reason buyers fixate on the 20% mark is to avoid Private Mortgage Insurance (PMI). While it is true that putting down less than 20% usually requires you to pay PMI, it is rarely the dealbreaker people think it is.

Think of PMI as a tool that allows you to start building equity today rather than years from now. In many cases, the monthly cost of PMI is significantly less than the amount you would lose by waiting for home prices to appreciate while continuing to pay rent. Plus, PMI doesn’t last forever—once you reach 20% equity in your home, you can usually request to have it removed.

4. STRATEGIC USE OF CASH

Even if you have 20% in the bank, putting it all into your down payment might not be the smartest move for your financial health. Many savvy buyers prefer to put down 5% or 10% and keep the rest of their cash liquid.

You will need funds to cover closing costs, which typically range from 2% to 5% of the loan amount. Beyond that, owning a home comes with surprises. Keeping a healthy emergency fund means you are covered if the HVAC system dies in your first winter or if you want to make immediate renovations to personalize the space.

YOUR NEXT STEPS

Don’t let an outdated rule of thumb dictate your timeline and keep you trapped in the renting cycle. The absolute best way to know what you actually need is to talk to a real estate professional and look at your unique situation.

Ready to see what you actually qualify for? Contact me today, and let’s get you connected with a trusted lender who can show you the real numbers. Your dream home might be much closer than you think.

What is PMI (or MIP) and how do I get rid of it?

PMI (short for ‘private mortgage insurance’) is one of those things in life that is both a curse and a blessing. If you put down less than 20 percent of the loan amount when you take out a conventional loan, you will be required to pay a monthly mortgage insurance premium (typically tacked on to your mortgage payment) to cover the lender in the event you mess up and default on the loan.

Without it, cash-poor homebuyers can’t get a mortgage.

With it, your house payments are higher, it takes a long time to get rid of (with some loans it never goes away) and it only protects the lender.

If you have an FHA-backed loan it’s called MIP for mortgage insurance premium. “MIP is required on all FHA loans, regardless of the size of your down payment,” according to Molly Grace at rocketmortgage.com.

“FHA loans require both an upfront mortgage insurance premium (UFMIP) as well as an annual premium payment, or annual MIP,” she concludes. 

Mortgage Insurance and the FHA-Backed Loan

Borrowers who were granted an FHA-backed loan prior to June 3, 2013 can get rid of this monthly headache when the loan reaches a 78 percent loan-to-value (LTV) ratio for a 15-year loan.

If you have a 30-year loan you’ll need to wait until your LTV reaches 78 percent AND you’ve been paying the premium for a minimum of 60 months, which is government-speak for five years.

Calculate your LTV by dividing your current loan balance by the current appraised value of the home. Here’s an example of how this works from the experts at bankofamerica.com:

“You currently have a loan balance of $140,000 … Your home currently appraises for $200,000. So, your loan-to-value equation would look like this:

$140,000 ÷ $200,000 = .70

Convert .70 to a percentage and that gives you a loan-to-value ratio of 70%.”

FHA borrowers who put down 10 percent on a home after June 3, 2013 must wait 11 years to have the MIP requirement terminated. If you pay less than 10 percent down – which is the beauty of the FHA loan, after all – you must continue to pay MIP for the life of the loan.

Conventional Loans and PMI

The Homeowner’s Protection Act of 1998 states that homeowners who have a conventional loan on their primary residence, purchased after July 29, 1999 can request a cancellation of PMI once they have 20 percent equity in the home.

The same law says that the lender must automatically terminate PMI on the date that the loan is scheduled to reach a 78 percent loan-to-value ratio – not based on payments made – but according to the date the loan should reach this milestone, as listed on the initial amortization schedule.

The law gives borrowers another way to realize relief from PMI by stating that the lender has to release you from the requirement when you are at the midpoint of your loan’s amortization schedule, regardless of your LTV.