Saving for a home loan downpayment can be a bit challenge for many folks on Cape Cod so let’s review how much you really need?
A downpayment on a home is the amount cash you pay when you buy a home and the equity you begin with. The downpayment is a percentage of the purchase price and inversely related to the loan to value (LTV). For example, if you put 10% down on a home your LTV is 90%.
Most conforming loan programs will allow you to put anywhere from 5% down or more if you qualify. Most lenders like to see a borrower put 20% down. This will most likely get you a better interest rate, no Private Mortgage Insurance to pay (PMI) and reduce your monthly payment because you are borrowing less money.
If 20% is not an option, there are many “government” programs and programs from Fannie Mae and Freddie Mac available to you as well. FHA is a government program that allows for as little as 3.5% down on a primary residence. FHA guarantees a portion of this loan and will charge a borrower an upfront mortgage insurance premium and have monthly PMI as part of your payment.
Another popular government loan for Cape Codders is a USDA or a rural housing loan. This loan is 0% down in eligible areas. If you’re an active or retired service member you may also be eligible for a Veteran’s Loan that offers 100% financing.
Other options for putting 3% down include Mass Housing Loans, Home Possible loans, Home Ready Loans and Fannie 97% loans. Some of these require you to be a first time home buyer and have income limits that the borrower needs to not exceed.
If you want to buy a vacation home on Cape Cod, you will need to put at least 10% down.
If you want to buy an investment property and rent it out, you will need to put at least 20% down.
When you decide on the right downpayment it should always come from your savings, stocks, liquid assets or 401K account.
Many loan programs allow all of the downpayment to be in the form of a gift from a family member.
Lastly, to avoid PMI without 20% down you may want to consider a “piggyback” mortgage or 80/10/10 financing. This scenario has an 80% first mortgage with no PMI, a 10% down payment and a 10% separate mortgage.
As you can see, there are many different types of loans available. Finding the right mortgage for your situation is important. It’s always good to sit down with a mortgage banker and ask about downpayment options when you shopping for a mortgage.