The low down payment mortgage has become the standard entry to homeownership in the U.S., thanks to ever-rising home prices, low savings rates and sluggish income growth. Here’s how to get on the housing ladder if you don’t have a pile of cash.
More than 1.3 million homeowners put less than 20 percent down on their mortgage in last year, according to a report by the U.S. Mortgage Insurers (USMI) association. The number of low down payment mortgages backed by private mortgage insurance (PMI) shot up by 22.9 percent in the same period. PMI is generally required on mortgages with less than 20 percent down.
In fact, 58 percent of agency mortgages had some type of mortgage insurance, according to the Urban Institute. The majority of those home loans were insured by PMI (41 percent), followed by FHA (36 percent) and VA (23 percent). Mortgages with PMI have been on the rise since 2016, as more homeowners put less down.
For first-time homebuyers, low down payment mortgages are often the only way to attain homeownership. For many folks earning median incomes, saving for a down payment can take 20 years or more if the 20 percent threshold is to be reached.
|State||Number of buyers with PMI||First-time homebuyers|
|The top five states for low down payment home financing in 2019, according to USMI.|
The median household income in California is $70,500 and the median sales price for a single-family home is $575,160. If a median earner saved $4,700 per year it would take them 15 years to save up 20 percent, and that’s if home prices stayed where they are.
In low-cost states like Alabama, where the median household income is about $50,000 and the median home price is $168,000, saving up 20 percent or $33,600 would take almost about six years if you can afford to save 11 percent of that median income or $5,600 per year.
For many people saving money can be challenging. A recent Bankrate survey showed that the number one financial regret Americans have is not saving enough for emergencies. The top financial goal, however, was to pay down debt (22 percent).
Compound a lack of emergency savings with personal debt, and putting aside cash for a down payment may get pushed down the list of priorities.
“Given the current economic environment and the desire of many people to keep more cash on hand, low down payment loans are more important than ever,” says Lindsey Johnson, president of USMI. “Loans backed by private mortgage insurance are a great option as a time-tested means for accessing homeownership sooner while still providing credit risk protection and stability to the U.S. housing system.”
What is PMI?
PMI protects the lender in case you stop paying your mortgage. It helps offset their risk for borrowers who put less than 20 percent down on the purchase price of their home. The less cash a buyer has invested in the home, the more risk the borrower assumes, hence PMI.
Most low down payment loans require PMI, which is a monthly premium you pay to the insurer. In case you default, the insurer will write a check to your lender to make up for any losses incurred in disposing of the home after foreclosure. Keep in mind, there are some low down payment mortgages that don’t require PMI, such as Bank of America’s Affordable Loan Solution mortgage, which requires just 3 percent down and no PMI.
On average, PMI costs 0.55 percent to 2.25 percent of your loan amount, according to the Urban Institute. For a $200,000 mortgage, your PMI can cost $1,100 to $4,500 each year, or around $92 to $375 per month until you reach 20 percent equity in the property.
Like your home loan, credit score and loan-to-value (LTV) ratio can affect how much your PMI costs. Borrowers with a higher credit score will benefit with lower PMI costs, so it pays to make sure your FICO is in good shape.
Where can I find low down payment mortgages?
Many banks, credit unions and online lenders offer low- or no-down payment loans. Navy Federal Credit Union, for example, has five different mortgage choices that require either no down payment or a small one.
Most states also have down-payment assistance programs, which can help people struggling to amass a down payment. California offers a program called MyHome Assistance Program for FHA, VA and USDA loans.
Be sure to talk to your lender about the options available to you. Ask if there are state programs or specialized loans you might qualify for. Finally, make sure you know what the current average interest rate is so that you can aim for that rate. If you’re quoted a rate that’s much higher, find out what you can do to qualify for the lower rate (this is usually a matter of improving your credit score).