3 problems with paying a down payment of less than 20% on a house

Most conventional mortgage lenders require a minimum down payment of 5% on the purchase of a home, although many have higher requirements. Some want 10% off. And some lenders may even charge 20% on closing.

But even if your lender doesn’t require a 20% down payment, you might want to force yourself to make one anyway. If you don’t, you risk these consequences.

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1. Private mortgage insurance

If you don’t put 20% on your home, you’ll pay extra in the form of private mortgage insurance, or PMI. The PMI is usually paid monthly in addition to your regular mortgage payment, and it can be 0.5% to 1% of your loan.

The purpose of PMI is to protect your lender in the event that you start to fall behind on your payments. If you get a 1% PMI on a $ 200,000 mortgage, that means you’ll spend an additional $ 2,000 a year to own your home until you’ve put enough money into your mortgage. for your PMI to be canceled. This happens automatically once your loan balance drops to 78% of your home’s value.

2. A long road to building equity

Equity is the part of your home that you own. If your home is worth $ 250,000 and your mortgage balance is $ 200,000, that means you have 20% of the equity in your home, or $ 50,000. If you don’t make a 20% down payment on your home, it will take longer to build up enough equity to be able to borrow against it.

For example, to take out a home equity loan or HELOC (Home Equity Line of Credit), a lender may require that you already have 20% equity in your home. So if you start with less than 20% down payment, it may be years before you can use your home as a source of money.

3. You might have problems if you have to sell

It is possible that your financial situation will change after signing your mortgage. You could lose your job, receive a new job offer that requires you to move, or encounter some other situation that requires you to sell your home. But here’s the problem: The less you invest in your home, the greater your chances of not paying your mortgage when the need to sell arises.

When you’re underwater with a mortgage, it means your home’s market value isn’t high enough to cover your mortgage balance. At this point, you could be forced into foreclosure if your lender does not agree to a short sale. A short sale is when your lender agrees to sell your home for less than your mortgage balance and writes off the difference so that you are not responsible. Either option, however, could hurt your credit score and make it more difficult to buy another home once your situation improves.

Putting 20% ​​down payment on a house might not be possible – and to be clear, you don’t necessarily need to make a 20% down payment. You can have a lot of options to get a mortgage with less money. Some of these options may include:

It is also not uncommon to buy a home without a down payment. Just be aware of the repercussions that could result if you don’t put in 20% less, and make sure you accept them. Otherwise, you may want to delay the purchase until you are able to bring more cash to your closing.

About Matthew R. Dailey

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