The standard down payment to purchase a property is 20% of the appraised value (not always the sales price). If you have less than 20% down there will be additional costs and expenses that a buyer must factor in to their search for a property.
There are several ways to approach having less than 20% down payment. One of the most common ways is with mortgage insurance. Mortgage insurance is a type of insurance that covers the lender in case the borrower defaults on their mortgage loan. With 20% down payment, there is enough equity or value in the property that mortgage insurance is not necessary. There are several types of mortgage insurance but the two most common are monthly mortgage insurance and lender paid mortgage insurance. You should consult your mortgage loan officer to understand the differences.
Another option to avoid paying the additional cost of mortgage insurance is to “stack” the loan, which means to get a 1st and 2nd mortgage. This could be in the form of a “fixed 2nd mortgage” or a “Home equity line of credit (HELOC)”. Not everyone will be able to get a 2nd mortgage as it will depend on the strength of the borrower. This 2nd mortgage may allow you to avoid mortgage insurance but may lead to a higher monthly payment now or in the future. You should consult your mortgage loan originator to explain to you the benefits and downsides.
The third option is to take advantage of 1st time home buyer programs when available. Lenders may offer special programs for 1st time home buyers that address low down payment requirements. There may also be government programs or loans that have low or zero down payment requirements.
* Consult your mortgage loan originator for their lender’s down payment guidelines.