What exactly is a conventional loan down payment?
Whereas it is very easy to buy yourself a pair of Nikes or your favorite burger at MacDonald’s, buying a house is no stand-up comedy joke. It usually takes a lot of careful planning and research before it is actualized. One major factor towards making this dream come true for you is the issue of financing. Just how in the world are you going to afford that dream house that has been giving you sleepless nights?
With an average home cost in the United States of America playing around the range of $200,000, this concern is understandable. That is where mortgage lenders come into the picture. Although paying a $200,000 purchase price in cash may not be possible for most people, financial institutions can help you carry this burden by offering you a home loan.
Conventional loans, also known as conforming loans, account for more than half of all US mortgage loans today. They are referred to as conforming because they follow the guidelines set to standardize US mortgage lending, overseen by two agencies: Federal National Mortgage Association [Fannie Mae], and Federal Home Loan Mortgage Corporation [Freddie Mac]. A conventional loan therefore is not formally associated with any government entity, such as the Federal Housing Administration [FHA], United States Department of Veterans Affairs [VA] or the United States Department of Agriculture [USDA].
A conventional loan down payment, therefore, refers to the percentage of the purchase price that you are required to pay upfront to qualify for conventional mortgages. Although some people may be misinformed that a 20% down payment is a must to qualify for a conventional loan, this is not the case. Freddie Mac and Fannie Mae have made factors friendly to low income individuals to access these loans at a 5% minimum down payment or even at a slashed 3% conventional loan down payment for Conventional 97 loans. With a down payment of less than 20%, private mortgage insurance [PMI] is however needed for all conventional loans.
A deeper look into conventional loans
There are many factors to consider before choosing a conventional loan as your means of buying a house. First, being in a position to pay a 20% conventional loan down payment can be very profitable in the long run. As stated above, any down payment below 20% attracts a private mortgage insurance premium per month on top of the set mortgage payment for that month. It means that the smaller the down payment you can afford to settle for, the more the cost on your plate in the long run. For instance, if you wanted to buy a home going for the purchase price of $200,000, with a 30-year fixed-rate mortgage and 4% interest, you would be required to pay $763.86 per month if you paid a 20% down payment, and with no extra insurance costs. A 5% down payment on the other hand would attract a $1,022.67 per month payment inclusive of insurance costs.
Another factor to consider before choosing the conventional loan down payment to settle for is the fluctuations in housing markets. Like any other markets such as the stock market, the housing market is also subject to varying parameters that can either lead to increase in home market value or a crash. If you choose to pay a higher down payment like 20 percent, the amount you owe is greatly reduced. Even if the value of your home were to go down after you have purchased it, chances are that your home would still be worth more than the amount you owe. If you opt for the minimal 5% down payment or the conventional 97’s 3%, you would be vulnerable to any storms that may hit the shore. A decrease in home value may see you owe more money in your mortgage loan than the actual value of your house. This is very risky because financial institutions may avoid you like when seeking a home equity loan.
Many people are increasingly approaching mortgage lenders for conventional loans. But like any other forms of credit, loans require a lot of discipline and being informed. For instance, it is important to note that conventional loans are open to individuals as well as investors. Conforming loans also do not have income limits or sales price limits. There is however maximum mortgage limits calculated based on the county in which a home is located. The numbers of living units also directly affects the maximum loan limit, and so the game is different based on whether you are dealing with a condo, a single family unit, a duplex, triplex, 4-unit… and so on. If a seller willingly offers to pay the closing costs for a buyer, they are allowed to do so though it’s under no obligation.
Although different mortgage lenders have different regulations when it comes to the issue of using gifts from family and friends to finance down payments, Fannie Mae and Freddie Mac loans are a bit friendly on the topic. In the case of a 5% down payment, they can allow for 2% of that amount to come from a gift. They give flexible conforming loan terms too for 10, 15, 20, 25 and 30 years. Eligibility is extended to US citizens and permanent resident aliens who must provide proof of lawful permanent residency. Basically one must live and work in the US legally and have a social security number.
FHA loans and VA loans
A VA loan is another popular mortgage loan in the US. This is a loan that is guaranteed to the United States Department of Veteran Affairs for current US military members, American veterans, reservists and some surviving spouses who have not remarried. These loans can be used to buy condominiums, single-family homes, manufactured homes, multi-unit properties and new construction. These loans are offered by qualified lenders and guaranteed by VA, with an aim of helping eligible veterans to access home loans with no down payment. VA loans enable veterans to access huge amounts of money with paying private mortgage insurance, thus widening their options.
FHA loans on the other hand are insured by the Federal Housing Administration. They are very popular, especially among first-time home buyers due to have having less demanding credit score requirements and down payment percentages. With a credit score of 580+ for instance, you can qualify for a FHA loan with a 3.5% down payment. You can still access a FHA loan with a lower credit score of 500-579 with a 10% down payment. One must however pay additional mortgage insurance premiums [MIP] that cover the lender if you the borrower decides to default on mortgage payment. There are many other regulations lenders consider before awarding FHA loans like a steady employment record, a valid social security number among other factors.
Deciding which home loan suits you best
Buying a home is without a doubt one of the most crucial financial decisions that you will be faced with in life. The earlier you start practicing wise financial behavior and saving towards this goal, the sooner you will become a homeowner. Choosing the right mortgage lender to offer you a home loan is also a very sensitive step like buying the house itself. It requires consulting loan officers and any other persons with reputable knowledge in the field. Your career path may automatically suggest a specific loan type for you; like how a US military officer may bend towards a VA loan that may not be available for a teacher for instance.
Other sensitive factors to consider may be your credit score rating, which may draw the line like in the case of a FHA loan. Anyone with a credit score of less than 500 is automatically not eligible for a FHA loan, whereas another person with a credit score of 500-579 may only access a FHA loan with at least 10% down payment unlike the 3.5% required for those with a 580+ score. The money factor is the elephant in the room because with large sums of disposable cash, you could buy your home for liquid cash or settle for the friendly conventional loan with a 20 percent down payment and no private mortgage insurance payments.
Buying a house, like any other important financial venture, requires ultimate discipline and the right information. You need to know how to balance your income and keep your expenditure to a minimum so as to leave room for saving towards buying that dream home. But all in all, whether you get a gift from a friend or relative to pay for the down payment, or you hit the jackpot, owning a home is one awesome achievement that everyone should strive towards.