HOME
Tips on Buying a House with a Small Down Payment
Decision Center
..........................................
BACK TO MAIN
Tips for Deciding How Much to Put Down on a House
If you've decided to make a small down payment, here are four ways to get your house with only a modest cash outlay:
1. Government programs
Mortgages issued by the Federal Housing Administration (FHA) have lower down payment requirements than conventional loans. So long as you are willing to pay mortgage insurance (see below), the down payment may be less than 5 percent of the purchase price. You also may be able to finance the closing costs. However, you must qualify for such loans and they are offered only for the purchase of homes below a set value, depending on location.
Meanwhile, Veteran's Administration (VA) loans require no down payment. Naturally, only veterans or active military personnel qualify for these loans, which also include below-market mortgage rates.
The paperwork is fearsome and may turn off some sellers. Lenders also have problems with some of the restrictive provisions of VA loans, which include allowing sellers to charge 1 percent (one point) of the mortgage as an upfront fee. Often the seller pays the extra point to make the deal and includes it in the purchase price. The government has put its stamp of approval on this "clandestine" arrangement, by allowing the buyer to deduct interest rates for financing these seller-paid points.
2. Bank mortgages and private mortgage insurance
Traditional bank lenders require at least 20 percent of the purchase price as a down payment. But even here there is flexibility if you're willing to pay for private mortgage insurance (PMI). New rules are being proposed that will automatically cancel the policy and eliminate its cost, once you've accumulated at least 20 percent equity in the home.
The cost of PMI depends on how much you put down. Expect to add about 0.5 percent to your interest rate. But, the premium isn't tax-deductible. The biggest price advantage occurs if you put down less than 10 percent, but more than 5 percent. There seems to be little difference if you put down 10 percent or 15 percent. Premiums also are higher if you take an adjustable-rate mortgage.
Some buyers opt to take a first and a second mortgage instead of paying for PMI. The determination depends largely on a comparison of the cost of PMI and the interest you pay on the second mortgage, after taking its tax-deductibility into account.
3. Portfolio lenders
Portfolio lenders or private lenders are usually chartered to accept as little as 5 percent down. Those that do usually require compensation in the form of higher interest rates. To find private lenders, check out Microsurf, which eliminates lenders that deliberately give low quotes they don't fulfill. See also Bank Rate Monitor, which lists 1,400 sources. To check up on thrift associations, visit the Federal Deposit Insurance Corp. Web site, and for mortgage lenders, see DiTech and Mandarin Mortgage.
An important feature of many of these loans is that, similar to the VA mortgage, they may be "assumable" (taken over by your buyer when you sell). Sometimes the assumption is contingent on qualifying and paying assumption fees. These contingencies are almost solely for the benefit of the lender, and do you little good if you get a non-qualifying buyer.
4. No money down
You've been hearing about this for years, and it can work. The usual no-money-down strategies are:
n
To assume debts of the seller instead of giving him the cash to pay them off
n
To give the seller a piece of the "back end" when you sell
n
To get your first or second mortgage from the seller
Such special arrangements are hard to find, but they do exist. The no-money-down search works best with investment property. The process may be impossible when it's your own home with limitations of size, school district and personal preference to consider. Worst of all, the price of a no-money-down property may be higher than normal because sellers and lenders will want a premium for such a deal. 
I'm ready to buy, but where do I start?
Articles
|
Next Steps
|
Copyright 1998 Microsoft Corporation