How Low Can You Go?
Before we get into today’s topic, I want to introduce a critical member of the Minngo team: Dean Mullins. He has extensive sales experience, and is dedicated to helping our clients achieve their goals. We are very fortunate to have him on the team, and I would encourage you all to reach out to him for any questions that you may have.
Now, on to down payments. There are two questions that almost every single homebuyer asks when considering whether to buy a home:
- How much can I afford?
- How much do I need for my down payment?
While MinnGo does not provide or broker loans, our team is well versed in many of the financing options available on the market, and can explore these options with you to make your purchasing experience seamless.
When most people think of buying a home in the Bay Area, they think of those all-cash buyers who have been making headlines for years. However, with this article, I will highlight the other options available that homebuyers actually utilize – which is not the all-cash offer. The truth is – even in the Bay Area – you do not need 100% cash to compete and ultimately purchase a property.
Another common belief (and myth) is that you need 20% down. Without getting overly technical, most of the time with a down payment of less than 20%, you are going to need a form of Mortgage Insurance (MI) [mortgage insurance is used to protect the lender from a loss if the borrower defaults on the loan]. While MI may increase your monthly payment, if you do not have or do not want to put 20% down, it enables you to get into the market. Contrary to popular belief, this still can be a competitive offer and in reality a great mortgage broker/lender is more important than a higher percentage down payment.
However, from a buyer’s perspective, there are benefits from putting more down [i.e. lower interest rates, no Mortgage Insurance Premiums (MIP) or Private Mortgage Insurance (PMI), etc.]. You also will have a lower monthly mortgage payment (assuming the same purchase price) compared to someone who is borrowing more.
Here are some common breakdowns for down payment ranges:
20% or greater down. The 20% or greater down is relatively straightforward (although every transaction is unique). If you plan to do this, I suggest you speak with a mortgage broker/lender and have them walk through the process of securing a mortgage with you. If you need any recommendations, please contact us and I can give you a couple of options.
10%. Putting between 10% and 20% down is a viable option for many Bay Area residents. In this scenario, most of the time (not always), you will either incur PMI, or have a second mortgage in addition to your first mortgage. The second mortgage typically has a higher interest rate and/or shorter term. While you may be weary of incurring PMI, many lenders will take it off once the loan-to-value (LTV) of the property is less than 80% (i.e. as you pay down the mortgage balance or if your home increases in value).
3.5% Generally, when you put between 3.5% and 10% down, most borrowers are getting a Federal Housing Administration (FHA) loan (although you can get a conventional loan in this range too). An FHA loan is a mortgage insured by the Federal Housing Administration. For borrowers, one of the requirements for the loan is MI. You can find more information about FHA loans here.
0% This option is generally only available to Veterans through a Veterans Administration (VA) loan or through the United States Department of Agriculture (USDA), but is something to keep in mind. Also, these guys do it too.
If you ever have any questions at all, please do not hesitate to reach out. At MinnGo, we realize that real estate is not something our clients think about everyday. Lucky for you, that is what we live and breath.
Until next time.