Rents across the nation are on the rise. According to Rentcafe.com, the average rent paid in Minneapolis currently stands at $1,658 – more than a 7.0% increase in just four years. This rise in the cost of living, paired with the gradually rising interest rates by the Federal Reserve, is leading the renting population to consider the possibility of homeownership. Most prospective homebuyers say they need assistance with their down payment (71%) and help to understand what they can afford (80%).
The average down payment for all homebuyers in 2022 was 13%. For homebuyers aged 31 years and younger, that number dropped to 8%.
And many people put down even less – or no money at all.
As buyers begin to weigh their loan options, it is important for them to understand that a 20% down payment may not be necessary to get them into a home. With today’s rising home values the ability to reach that 20% threshold has been slowly diminishing. While a 20% down payment is a great goal, for many buyers it is not a possibility or a preference. Buying a home that is affordable with a lower down payment is an option that many buyers choose. In fact, according to SmartAsset.com, the average down payment for first-time homebuyers is currently around 7%. It’s a question of where will your savings best perform.
Mortgage companies gain confidence in lending to buyers placing low down payments by requiring private mortgage insurance (PMI). PMI is a layer of protection for lenders, but an added expense for borrowers. This added expense is in place until the homeowner has paid for 78% of the home’s sale value at the time of purchase. PMI is most often paid as an additional charge on your monthly mortgage bills. At this time, mortgage insurance premiums, such as PMI, are 100% deductible for households with an adjustable gross income of $100,000 or less. This is subject to change as Congress must approve this annually.
Conventional Mortgage: 3% Down
First-time homebuyers may be eligible for conventional financing with only 3% down. The loan amount must be at or below $453,100. The borrower will pay PMI until the loan balance reaches 78% of the property value and then will automatically drop off.
Dept. of Veterans Affairs: $0 Down
VA loans are available to members of the U.S military, both active duty and veterans. The borrower pays a funding fee that is typically rolled into the mortgage. There is no Mortgage Insurance.
Minnesota Housing Finance Authority: Minimum Investment of $1000
MHFA offers 3% financing options in Minnesota to low and moderate-income buyers. They offer a 2nd mortgage that can be used for the down payment and some of the closing costs.
Federal Housing Administration: 3½% Down
FHA loans are a low down payment option, especially for borrowers who don’t have perfect credit scores. The borrower pays an upfront funding fee that is rolled into the mortgage plus monthly Mortgage Insurance (MI) that is paid for the life of the loan.
USDA Rural Development: $0 Down
RD loans are available to moderate and low-income borrowers who are purchasing their primary home in rural areas. The home must be in a USDA eligible area and the borrower must meet certain income requirements.
Check with your mortgage or loan officer to see if you qualify for any of these programs and for more detailed information regarding gifting and other financing options. Need a recommendation on who to contact? Connect with your Fazendin Realtor®.
The Federal Housing Authority (FHA) and the Department of Veteran Affairs continue in their ability to help those looking to buy by providing loan programs that require no down payment or a small one, such as those listed above. All of the programs listed also allow for gifts from an acceptable donor. Gifted funds may be used for all or part of the down payment and closing costs. In general, a gift can be provided by a relative, fiancé or domestic partner. The FHA also expands the eligible donor list to include employers under certain circumstances.
Regardless of how much you plan to put down, it’s important to take a realistic look at your financial situation before beginning the home search process. “Homebuyers have learned that getting their financing in order upfront helps prepare them to shop for a home with confidence and puts them in a more advantageous, competitive position, especially in tight markets,” said mellohome CEO Chris Heller in a loanDepot press release. Having worked with home buyers and sellers for more than fifty years, Fazendin Realtors couldn’t agree more with this statement.