Most homebuyers assume that they’ll need to come up with 20 percent of a home’s purchase price as a down payment. In fact, this is one of the biggest hurdles buyers face on the path to home ownership.
While 20 percent is pretty standard, there are ways to avoid coming up with such a sizable chunk of cash—so here’s what you need to know.
Can You Buy a House With Less Than 20% Down?
In most cases, if you buy a home with less than 20 percent of your own money as a down payment, you’ll end up paying for private mortgage insurance, or PMI. There are a few exceptions, though, such as using a VA loan and a handful of government-backed programs.
What is PMI?
Private mortgage insurance protects your lender in the event that you stop making your mortgage payments. You can usually cancel your PMI once you’ve built up 20 percent equity in your home, but every lender has a different policy, so it pays to find out what you’re getting into before you sign the dotted line.
You don’t get to choose a private mortgage insurer. Your lender chooses one and tacks the cost on your mortgage payments. The rate typically depends on the loan amount, how much of your own money you kicked in for a down payment, the loan term, and your credit score.
PMI usually costs between 0.3 percent and 1.5 percent of the original loan amount per year. That means if you’re purchasing a $400,000 house in Lakewood, you could end up paying an extra $1,200 to $6,000 each year until you’ve built up 20 percent equity in the house.
Buying a House Without PMI
There’s an exception to PMI requirements: If you qualify, you could use a VA loan. In order to qualify, you must be:
- An honorably discharged member of the U.S. Armed Forces
- An active duty service member
- A current or former National Guard or Reserve member
- A surviving spouse of a qualified veteran or service member
You can typically apply for a VA loan through your lender, but the Veterans Administration has more comprehensive information about the application process on their website.
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