New information from the National Association of Realtors shows that well over half of all first-time homebuyers – 66 percent – are now making down payments of less than ten percent of the property’s value, as are 40 percent of those who are repeat homebuyers. Traditionally, buyers have needed to put down as much as 20 percent in order to qualify for a mortgage, but today, new options have made home ownership available to many who do not have a large amount of savings or cash on hand.
However, many who apply for a mortgage and need a low down payment will also need to get Private Mortgage Insurance (PMI) or, if applying for a Federal Housing Administration (FHA) loan, a type of mortgage insurance referred to as MIP. These are required with most mortgages where the buyer is putting down less than 20 percent.
With a conventional mortgage, the buyer may be able to put down a minimum of three percent while also paying for PMI. A conventional mortgage does allow the buyer to utilize gift funds provided by family members to make the down payment, plus PMI can be deducted from the buyer's taxes. This deduction, which was recently extended through tax year 2017, phases out for taxpayers with adjusted gross income of $100,000 to $110,000.
With FHA MIP, the buyer cannot use any gift funds. FHA MIP also costs 1.75 percent of the property’s value upfront plus 0.85 percent paid every month. This can result in a large amount paid for mortgage insurance over the life of the loan.
Moneytips can help you refinance your existing home loan.