When people are buying a house, one of the biggest issues they're likely to face is the time and difficulty involved in building a sizable down payment. After all, many lenders require down payments that can easily stretch into the tens of thousands of dollars, and in today's economy that can be difficult for anyone – let alone first-time buyers – to put together.
However, there is a common misconception that people have to have the ability to make down payments of 20 percent to qualify for a mortgage, and that's not at all the case, according to The Mortgage Reports. In fact, many mortgage types allow for significantly lower down payments than that, sometimes as low as 3 percent or so. Some loans – such as those obtained through the U.S. Department of Veterans Affairs, don't require a down payment at all.
What to watch for
There may be plenty of reasons for borrowers to avoid high down payments, though, the report said. These include the fact that any amount they put down is difficult, or sometimes impossible, to get back in the event of a financial emergency. That's money that's given to the bank and can't be tapped again in the event of, say, job loss or an accident.
Moreover, if the value of a home drops unexpectedly in a relatively short amount of time, the impact of having that much money tied up in a down payment can be significant and could inch them closer to delinquency and default if they don't have additional savings to help cover some of their costs.
Likewise, it's often a good idea for people to put low down payments on homes that are a little outside their preferred price range, because doing so will allow them to lock in the deal that gives them a home, but won't hamstring them when it comes to making the resulting higher monthly payments, according to Money Under 30. Along similar lines, if home values in the neighborhood where a first-timer is buying are rising quickly, a low down payment helps them start to build equity more quickly.
Dealing with fixer-uppers
Moreover, making smaller down payments on lower-priced homes in need of renovations or repairs can be a good idea as well, according to Fortune. That's because, for every dollar put into the down payment itself, that's a dollar that can't go into renovating a bathroom or gutting a kitchen to start from scratch.
It's worth noting, however, that while there can be benefits to buying with down payments of less than 20 percent, there can also be drawbacks, such as higher mortgage rates and other requirements that can make the price of borrowing like this more significant than some might expect. That's in addition to the extra loan principal that comes with a low down payment.
As a consequence, borrowers should always talk to their financial professionals and real estate agents about the issues they face thanks to their unique situations, and find a solution that will help them realize their dreams of homeownership while maintaining a strong financial position.
For more information about this article, call 866-614-5959.