If you’re a first-time homebuyer and don't have a lot of money for a down payment, you might consider a mortgage through a government program such as those offered through the Federal Housing Administration (FHA) and the Department of Veterans Affairs. Patelco also offers mortgages for less than 20% down.
Find the right mortgage product
With the high cost of housing – especially in a place like Northern California – we know it’s difficult to come up with 20% of a home’s price. That’s why we offer pay mortgages for less than 20% down. Contact one of our home loan consultants and we can help you figure out the right product for you.
Expect to pay PMI
If you do buy a home for less than 20% down, expect to pay private mortgage insurance (PMI) as part of your total monthly payment. PMI is insurance that benefits your lender (not you) by protecting them in the event you default on your mortgage payments.
Typically, monthly PMI premiums are $45 to $65 per $100,000 borrowed. The cost of PMI depends on several factors, such as the amount of your down payment, your type of mortgage, and whether you pay premiums on a monthly basis or in a lump sum at closing. PMI premiums can significantly increase your monthly housing cost. Without PMI, however, you may be unable to qualify for a mortgage if you have no down payment.
The good news is that PMI can be taken off once you pay down your mortgage – typically when the balance owned drops to 78% or 80%. Talk to your lender about when you can remove PMI, and find out the steps to removing it.
Realize the risk of paying less than 20% down
A good reason to put at least 20% down when buying a home is so that you have enough equity in the house in the event you need to sell it quickly, for example due to an unexpected move or to avoid foreclosure. When you have sufficient equity in the home and need to sell quickly, you can walk away with cash after selling or at least break even. If you don’t have sufficient equity in your home (including because you paid less than 20% down), you may end up owing money on the home in the event you have to sell quickly or sell soon after buying.
Know when it makes sense to pay less than 20% down
Because PMI premiums may significantly increase your monthly housing cost, you should only pay less than 20% down if it makes sense to do so, or if you really want to buy a home but otherwise cannot afford to do so. Here’s some other situations where it may make sense to pay less than 20% down:
- When you need to conserve cash – including to make needed repairs or upgrades to the home you want to buy.
- When the house you want is well below what you can afford – this makes buying the home less risky. When the monthly payment is well below what you can afford, then it’s less likely you’ll need to sell the home in a hurry to avoid foreclosure.
- When you’re in a market where housing prices are rising rapidly – if the house you want is likely going to rise in value, you’ll increase your equity simply by owning it. If you’re in a market where values are flat or declining, it’s a better idea to make a large down payment.
- When you absolutely need to buy a house – if you’re living in a small space and your family is about to grow – such as through the birth of children or the moving in of a relative who needs care – your best option may be to buy now to get the space you need, even if you don’t have 20% down yet.
Source: Broadridge Financial Solutions, accessed October 22, 2019.