Do I Need 20 Percent Down to Buy a Home?

Putting down 20 percent of a home’s sales price as a down payment is the gold standard for buyers. Not only will they have an easier time qualifying for a mortgage, they will also avoid paying private mortgage insurance (PMI). Borrowers who put down less than 20 percent must pay PMI, which can add substantially to their monthly mortgage payments.

Buyers with less than 20 percent down still have many options to find a mortgage. The lowest down payment loan programs (zero down) are offered by the Veterans Administration (VA) and Department of Agriculture (USDA rural home loan program). But both of these programs have tight restrictions that rule out most people – i.e. veteran status (VA loan) and geographic limitations (USDA).

Next lowest is Fannie Mae and Freddie Mac, the 2 big quasi-governmental agencies that buy most home mortgages. Both Fannie and Freddie have home loan programs requiring just 3 percent down, but they also come with a variety of eligibility criteria, including in some cases, income cutoffs. Fannie and Freddie also require credit scores above 720. For buyers with lower credit scores, the Federal Housing Administration (FHA) has home loans requiring as little as 3.5 percent down, and credit scores as low as 600. FHA is also more flexible on debt-to-income. (Debt-to-income is the ratio between a borrower’s gross monthly income and his/her total monthly recurring debt.) FHA may accept debt-to-income ratios over 50 percent. Fannie and Freddie will generally not go higher than 45 percent debt-to-income.

On the minus side, FHA requires borrowers pay private mortgage insurance for the life of the loan. On conventional mortgages offered by Fannie and Freddie, borrowers can cancel PMI once their equity in the home reaches 22 percent. FHA borrowers do not have that option. They must pay PMI for the life of the loan.

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