For many Americans, owning a home continues to remain just slightly out of reach. For more and more families, saving the money for a down payment is the biggest obstacle to homeownership. Many people mistakenly believe that you have to come up with a down payment equal to 20 percent of the price of a home.
Traditionally, lenders have required that home buyers be able to make a down payment of at least 20% of a home's purchase price to get a home loan or mortgage. However, mortgage lenders will grant home loans to qualifying home buyers with a down payment of as little as 3 to 5 percent of the purchase price, if the mortgage is insured.
In fact, home loans with down payments of less than 20% are increasingly popular. They are called "low down payment mortgages."
This is good news for the millions of home buyers who are finding it difficult to save a large down payment, especially for their first house.
But keep in mind that the larger the down payment, the less you have to borrow, and the more equity you'll have. When considering the size of your down payment, consider that you'll also need money for closing costs, moving expenses, and - possibly -repairs and decorating.
If a 20 percent down payment is not made, lenders usually require the home buyer to purchase private mortgage insurance (PMI) to protect the lender in case the home buyer fails to pay. When government-assisted programs such as FHA (Federal Housing Administration), VA (Veterans Administration), or Rural Development Services are available, the down payment requirements may be substantially smaller.
You will need to ask about the requirements for a down payment, including what you need to do to verify that funds for your down payment are available. Special programs might be offered by lenders, so don't forget to inquire about them.
If PMI is required for your loan, you will need to ask what the total cost of the insurance will be, how much your monthly payment will be when including the PMI premium, and how long you will be required to carry PMI.
Simply put, mortgage insurance protects the mortgage lender against financial loss if a homeowner stops making mortgage payments. Lenders usually require insurance on low down payment loans for protection in the event that the homeowner fails to make his or her payments. When a homeowner does not make mortgage payments, a default occurs and the home goes into foreclosure. Both the homeowner and the mortgage insurer lose in a foreclosure. The homeowner loses the house and all of the money put into it. The mortgage insurer will then have to pay the lender's claim on the defaulted loan.
For this reason, it is crucial that the family buying the home can really afford it -- not only when they buy , but throughout the time period of the loan.
Although the cost of the mortgage insurance is paid by the home buyer, or borrower, the mortgage insurer works directly with the lender. Mortgage insurance is available to commercial banks, mortgage bankers, and "savings & loans", and all of which offer mortgage loans to home buyers.
Remember that mortgage insurance is not the same as credit life insurance, also called mortgage life insurance. This type of policy repays an outstanding mortgage balance if the person who took out the insurance policy dies.
Like home or auto insurance, mortgage insurance requires payment of a premium, is for protection against loss, and is used in the event of an emergency. If a borrower can't repay an insured mortgage loan as agreed, the lender may foreclose on the property and file a claim with the mortgage insurer for some or most of the total losses.
You need mortgage insurance only if you plan to make a down payment of less than 20% of the purchase price of the home. The FHA offers several loan programs that may meet your needs.
You can also try out a PMI. PMI stands for Private Mortgage Insurance or Insurer. These are privately-owned companies that provide mortgage insurance. They offer both standard and special affordable programs for borrowers. These companies provide guidelines to lenders that detail the types of loans they will insure. Lenders use these guidelines to determine borrower eligibility. PMI's usually have stricter qualifying ratios and larger down payment requirements than the FHA, but their premiums are often lower and they insure loans that exceed the FHA limit.