The real estate market along the Front Range is competitive! As median home prices continue to rise, first-time homebuyers are faced with a number of options when selecting an appropriate down payment for their specific situation. With all these options, homebuyers should take the important first step to learn about these down payment opportunities.
Many buyers, especially first-timers, subscribe to some falsehoods, keeping them out of the game for much longer than necessary. For example, many have the misconception that you need a 20% down payment, or that sellers won’t accept gifted offers.
What is a down payment?
A down payment is the amount of money a buyer pays at closing to fund a home purchase, usually stated as a percentage of the total home price. The purpose of a down payment is to demonstrate personal involvement in the purchase of a house. It also protects the lender against possible losses in the event of default.
A 20 percent down payment is known as the standard down payment, giving the buyer instant equity in his or her home, greater buying power and lower monthly payments. Plus, it means you don’t need to purchase mortgage insurance. 20 percent isn’t the only option.
Alternatives to 20 percent down
The following are some down payment alternatives for homebuyers:
Three percent (or more) down payment
If you have limited funds for a down payment, your down payment can start at three percent down. In addition, all of these funds can be gifted from a relative. With down payments under 20 percent, the borrower pays private mortgage insurance (PMI) to insure the lender against losses in the event of foreclosure. The amount of coverage and premium are based on loan-to-value (LTV) and your credit score, with a maximum LTV of 97 percent. Payment options include a one-time mortgage insurance premium or monthly payments.
We’ve seen that the appreciation of homes in our area often outpace PMI. If you’re paying monthly, you can request an appraisal after two years. If the value of your home has gone up and the original LTV is now 80 percent, PMI may be removed (this is lender/investor dependent).
How much does PMI cost?
- For every $100,000 in loan amount:
- With three percent down, PMI would be approximately $690/year.
- With five percent down, $400/year.
- With 10 percent down, $290/year.
- With 15 percent down: $190/year.