Buying a home is a great long-term investment. However, qualifying for a mortgage will require a borrower to put forth a 20% down payment towards the purchase of the home. For many prospective buyers, this can be unaffordable. Fortunately, there are several ways that a borrower could qualify for a mortgage even if they have a low down payment.
Private Mortgage Insurance
One of the best ways that someone can qualify for a mortgage with a low down payment is by paying for private mortgage insurance, or PMI. PMI is a type of insurance that protects the lender against losses associated with a borrower going into foreclosure with an underwater mortgage. Most mortgage lenders today are willing to give a borrower a loan with as little as 5% down if the borrower pays PMI monthly. Fortunately, once you have achieved 20% equity in your home, you may be able to have the PMI requirement removed from your monthly payment.
Accept Higher Rate
If you do not want to pay PMI monthly, another option is to accept a higher interest rate. Most lenders today can roll the cost of the PMI into the mortgage. Many people that have a down payment of less than 10% will find that this is option will result in a lower monthly payment. However, the higher interest rate will remain in place for the life of the loan even after you have 20% equity. This option can be ideal for someone that doesn’t plan on keeping the mortgage for more than a few years.
Different Loan Programs
Another way that you could qualify for a mortgage with a low down payment is by taking advantage of mortgage programs. FHA mortgages are available for first-time home buyers with as little as 3.5% down. Other types of loan programs include those provided by the Veteran’s Association, USDA, and Mass Housing, which provide mortgages with as little as zero percent down. Depending on where you live, there may be additional state or local programs available to help you qualify for a mortgage with a small down payment.
If you’re thinking of buying a home and want to educate yourself on down payment options and mortgage information, download our First Time Home Buyers eBook now!c