Often the first question people ask when they’re looking to buy a home is “How much will it cost?” In reality, that question doesn’t mean much. It will usually take a couple questions to understand what they are really asking. The reason is that the “cost” to buy and own a home can mean many different things. In this article we’ll start with a more specific question:
“How much money do I have to put down?”
Often the two biggest hurdles to home ownership are your credit score and the down payment. As daily costs keep raising- many of us enjoy a standard of living that doesn’t leave much room for saving money towards the down payment of a house. Or you only recently thought about buying and will need some time to accumulate that amount in savings.
Here are some general categories of loans and the approximate down payment you would need for each. You should talk to a mortgage lender about what loan would be best for your situation and costs outside of the down payment you’ll encounter- such as closing costs, due diligence, escrows, and moving and temporary storage and housing.
Conventional Loan 20%+ Down Payment
The conventional loan is one of the most desirable loans due to its lower interest rates, no PMI, and broad coverage of residential properties. However, 20% is often a lot of cash down for first-time homebuyers. Especially in Chester County where the average home price is around $400k and start homes are typically between $150k-$250k. You would need $50k down to buy a $250k house with a conventional loan. These loans are great for move-up buyers, who will have some equity in their home sale to put towards their next house.
Conventional Loan with PMI 5% Down Payment
For those looking for a conventional loan, but don’t have 20% to put down at closing, some banks will offer a conventional loan at only 5% down. I usually recommend this when possible because although you will pay PMI each month, it’s less than FHA and you can remove it once you have 20% equity in the house (You owe less than 80% of the value of the home). It is also an easier process to get the loan because there are fewer requirements on the condition of the house- so sellers like to see a conventional loan over an FHA. This is typically where I start with home buyers. If they are unable to do 5% we will look at the options below- but if they can stretch their funds to this mark it usually works out better in the long run. There can be a lot of advantages going from 3.5% to 5%, more than going 5% to 19%, so sometimes it is better to put less down and save your money.
FHA loans 3.5% Down Payment
FHA loans are backed by the government and were created to stimulate home buying in the country. It’s a more regulated home program and not all homes qualify for FHA financing. Some condos don’t qualify as well as homes that aren’t in good condition. Because of these extra requirements, an offer with an FHA loan is not as strong as a conventional loan. I’ve had a client get their offer rejected because it was FHA and the real estate agent thought the extra inspections would cost the seller, even though it was a higher offer than what they ended up accepting. FHA loans allow a higher debt-to-income ratio (you can qualify for a higher payment), a lower credit score, and a lower down payment. So this is a common loan for first-time homebuyers in Chester County. The downside is the PMI you will be paying which will be a part of the loan until you refinance. It is a great way to get into the housing market, but not a long-term solution.
There are two more loan types that are great options but only for those who qualify for them. These were created by the government and have some stringent guidelines and are not available to all properties and/or all borrowers. If your Loan Officer doesn’t mention these to you, feel free to ask him or her about it. However, don’t be surprised if you don’t qualify, most Americans do not.
USDA Rural Development loan 0% Down Payment
A great loan to get if you qualify. The first qualification is on the property. The property must be located in a USDA RD zone. I think the goal of the loan is to help develop rural areas of the country. (side note: programs like this have been criticized for contributing for diminishing farmland and suburban sprawl). So the zones that qualify are more rural areas of the state. In Chester County, there are very few areas that qualify in West Chester and Great Valley School districts, but a good amount of options in Downingtown, Coatesville, Octorara, Kennett Cons, and Avon Grove.
The second qualification is on the borrower. You have to make enough money to qualify for the monthly payment- but there is a cap on how much money you can make. The government wants to make sure the funds are going to buyers who need it, so they disqualify people who make too much.
In many areas of Chester County, the only homes in an eligible area cost too much- so in order to qualify for the loan payment, you disqualified for the USDA program. This is why a lot of areas might be eligible in Downingtown school district- but there are not very many USDA RD loans.
VA Loan 0% Down Payment
This is one of the best and easiest loans, but it is only available for those who qualify. This loan is from the Veterans Administration so to qualify you have to be an active or retired military vet. This can be a huge benefit for those who have served in our military to get a loan for 0% down with no PMI.
There are a lot of variables when looking at loans for your home sale. If you have any questions about this information- feel free to send me an email at [email protected] or contact me through the tab on the top of the site. You also should check out one of our Seminars I do regularly with a loan officer to learn more about the process and get a chance to get your questions answers.