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Posted in: Buying a home, Getting a mortgage, First time homebuyer tips

I don't have 20 percent for a down payment. Can I still buy?

Buying a home without 20 percent down

Let’s face it, saving 20 percent of the price of a home is daunting – and depending on your debt, job or other factors, it could take you a long time to save up that kind of cash. But according to the National Association of REALTORS®, half of today’s buyers are taking a year or less to save for a down payment.

How is this possible? Well, alternative loan options are available for those who cannot save 20 percent for a down payment. Below, we offer insights you can use to understand these loan alternatives. But remember, everyone’s finances are different, so it’s best to consult with a financial advisor before you get started on the path to homeownership.

FHA loans

FHA loans are backed by the Federal Housing Administration, and they can benefit first-time homebuyers or those who are finding it hard to save up a 20 percent down payment. FHA home loans allow borrowers to pay as little as 3.5 percent in a down payment.

FHA loans do have limitations. First, FHA loans are meant to be “helper loans,” so they won’t allow you to finance a multi-million dollar home.  The limits for FHA loans are set by county.

Here are Minnesota’s FHA loan limits by county.

Here are Wisconsin’s FHA loan limits by county.

Last, FHA loans require you to pay mortgage insurance at closing and throughout the life of the loan. Mortgage insurance costs vary, so it’s critical that you factor this cost in when you’re considering buying. To determine if an FHA loan is right for you, talk to a mortgage loan officer.

VA loans

If you’re a veteran, you most likely know whether you are eligible for VA loans, which are private loans backed by the Department of Veterans Affairs (VA). VA loans are the only major loan type that don’t require a down payment and also don’t require mortgage insurance.

Your home mortgage consultant can help you determine if you’re eligible for a VA loan. View eligibility guidelines and VA loan benefits here.

Private mortgage insurance

If you can’t afford a 20 percent down payment, but also don’t qualify for FHA or VA loans, you still have options. A private lender may back your home loan but require you to pay private mortgage insurance, or PMI. PMI protects the lender if you default on your payments; as the borrower, you pay the premiums and the lender is the policy beneficiary.

Unlike an FHA loan, though, you won’t pay private mortgage insurance for the full life of the loan. A homeowner can request the cancellation of PMI once their equity position reaches 20 percent of the original value of the property. Once 22 percent equity is reached, the lender is required by law to cancel the PMI.

Getting started with less than 20 percent down

Even if you can’t save a 20 percent down payment, you may still be eligible for a loan. Talk with a financial advisor or a mortgage loan officer to determine the most responsible loan choice for you and your family.

For more insights you can use as you save for a down payment, follow #BuyerInsights on Twitter, Facebook, Instagram and YouTube.

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