Brandon Lee
A 20% down payment on a mortgage is a significant amount of money, and many people struggle to save this much. Some lenders will allow for a 10% down payment, but this may be more difficult to find and will likely come with a higher interest rate. There are several factors to consider when deciding on the size of a down payment, including the impact on your financial flexibility, the potential for higher monthly payments, and the ability to secure a competitive rate.
| Characteristics | Values |
|---|---|
| Possibility of getting a mortgage with 10% down | Possible, but may be challenging to find a lender |
| Lender type | Likely to be a regional lender or credit union, rather than a big bank |
| Loan type | Could be an investment property loan or a primary residence loan |
| Interest rate | Likely to be higher than with a larger down payment |
| Private mortgage insurance (PMI) | May be required, increasing monthly expenses |
| Credit score | A higher credit score may improve chances of approval |
| Debt-to-income ratio | Lenders may consider this in addition to the down payment |
| Other factors | Income, financial situation, and existing debts may also be considered |
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What You'll Learn
Pros and cons of 10% down payments
While 20% is often recommended as the ideal down payment for a mortgage, 10% is still a viable option for many home buyers. This is especially true if you have good credit and a stable income. A 10% down payment can open up a range of home loan options, including conventional loans and FHA loans. However, it's important to consider the pros and cons of a 10% down payment before making a decision.
Pros of a 10% Down Payment:
- A 10% down payment keeps more of your cash available for other expenses, such as closing costs or building an emergency fund. This can be crucial in high-demand areas with rapidly rising real estate prices.
- With a strong credit score, you may still secure a favorable interest rate, even with a lower down payment.
- A 10% down payment can be a smart choice if you have other financial goals or want to maintain a healthy emergency fund.
- It allows you to enter the housing market more quickly, which can be advantageous in competitive markets.
- A 10% down payment can open up a range of loan options, including conventional loans and FHA loans.
- You may qualify for additional benefits if you're a first-time homebuyer or eligible for special programs like USDA or VA loans.
Cons of a 10% Down Payment:
- You will likely need to pay Private Mortgage Insurance (PMI) since it's below 20%, adding to your monthly expenses.
- A lower down payment may result in a higher loan amount and increased monthly mortgage payments.
- Your lender might offer slightly higher mortgage rates compared to those with a 20% down payment due to the increased risk.
- It may impact your financial flexibility by tying up a substantial amount of your savings, limiting your ability to handle other financial commitments or make investments.
- Saving for a larger down payment can be challenging, especially for first-time homebuyers, and may not be feasible for everyone.
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How to get pre-approved for a mortgage with 10% down
While it is possible to get a mortgage with a 10% down payment, it can be challenging to find a lender. Big banks are less likely to offer these mortgages, so you may want to look into regional lenders or credit unions. Alternatively, a mortgage broker in your area may be able to help you find a lender that will engage with a 10% down payment. This type of mortgage is more common for primary residences than investment properties.
Step 1: Prequalification
Prequalification is an early step in the home-buying process. It gives you an estimate of how much you might be able to borrow based on your finances and a credit check. This step can be completed online, in person, or over the phone with basic information such as your income and expected down payment. Prequalifying can give you a sense of what's in your price range and help you work with your lender to identify the right mortgage options for your needs and goals.
Step 2: Find a lender
As mentioned earlier, finding a lender that will accept a 10% down payment may be the most challenging part of this process. Regional lenders and credit unions may be more open to these types of mortgages than big banks. Liberty Federal Credit Union, for example, offers an 80/10/10 program that allows you to finance your purchase with as little as 10% down.
Step 3: Gather required documents
To get pre-approved for a mortgage, you will need to provide various documents, including:
- W-2 tax form
- 1099s (if you have additional income sources)
- Pay stubs
- Bank statements
- Tax returns (typically two years' worth)
- Social Security numbers
- Current addresses
- Employment details
- Proof of income
If your down payment is coming from a gift or the sale of an asset, you will need a paper trail to prove it.
Step 4: Compare offers
It is essential to compare offers from at least three lenders to get the best rates and fees. This step can help you save a significant amount over the life of your mortgage.
Step 5: Apply for pre-approval
Once you have found a suitable lender and gathered all the required documents, you can apply for pre-approval. This process may take longer than prequalification as it requires more detailed information. After submitting your application, you should receive a pre-approval letter within 10 business days. Pre-approval confirms your creditworthiness and gives you a specific amount that you can borrow, making your offer more attractive to sellers.
Remember, getting pre-approved for a mortgage with a 10% down payment may be challenging, but it is possible with the right lender. It is always a good idea to consult with a mortgage advisor to explore your options and understand the short- and long-term financial implications of your decisions.
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Alternative down payment program options
While it may be challenging to find a lender that will agree to a 10% down payment, there are alternative down payment options available. These include:
- Down payment assistance programs (DAPs): These programs provide gift funds or supplementary loans at below-market interest rates to eligible borrowers. They are typically administered by state or local government agencies or private charitable organisations. Some programs also offer assistance with closing costs.
- Mortgage revenue bond programs: These are first-mortgage financing plans offered by state, county, city, and governmental authorities. They often include additional down payment and closing cost assistance exclusively for use with bond programs.
- FHA loans: These loans provide options with down payments as low as 3.5%. However, it's important to consider all costs involved, including upfront and long-term mortgage insurance and fees.
- VA loans: Guaranteed by the US Department of Veterans Affairs, VA loans are available to both active and retired members of the US military. They require no down payment and usually offer competitive mortgage interest rates and minimal closing costs.
- Employer assistance: In some cases, your employer may be able to provide financial assistance for your down payment.
- Nonprofit assistance: Some nonprofit agencies and charities offer down payment assistance to eligible buyers. The money donated by a charity does not need to be repaid.
- Owner financing: In some cases, you may be able to purchase a house with a low down payment through owner financing. This option may not require the use of your credit.
- Low down payment loans: Some banks, such as Wells Fargo and Bank of America, offer low down payment loans and grants that can assist with closing costs and make home-buying more affordable.
- 80/10/10 program: Offered by Liberty Federal Credit Union, this program allows you to finance your purchase with only 10% down, without the added expense of PMI (private mortgage insurance).
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Owner financing options
Owner financing is a type of real estate transaction where the property owner sells their property to a buyer without a traditional mortgage or cash. Instead, the seller finances the deal, and the buyer agrees to make payments directly to them. This option is also referred to as rent-to-own or lease-to-own, where the seller leases the property to the buyer who has the option to buy it for a set price at the end of the lease term. This setup presents both parties with distinct advantages and considerations.
Advantages of Owner Financing
Owner financing can be attractive to buyers facing challenges with traditional mortgage qualifications due to credit or income issues. It offers more flexibility in down payment and repayment terms, as buyers and sellers negotiate directly. It also attracts a wider range of potential buyers, including those with less-than-perfect credit scores, self-employed individuals, or those with unconventional income sources.
Seller financing can also be beneficial for sellers. By acting as the lender, sellers can negotiate competitive terms and benefit from steady income streams. It can also expedite the closing process, reduce closing costs by eliminating appraisal and bank fees, and increase the chances of finding a buyer more quickly.
Disadvantages of Owner Financing
There are also potential drawbacks of owner financing for both buyers and sellers to consider. For buyers, owner-financed properties may be challenging to find, as not all sellers are open to or knowledgeable about owner financing. There may also be higher interest rates, larger down payments, and legal implications depending on local laws.
For sellers, owner financing exposes them to the risk of non-payment and default. The seller's mortgage may include a due-on-sale clause that requires them to pay off the mortgage upon selling the house, precluding them from offering owner financing. There may also be federal and state laws that restrict the seller's ability to offer owner financing. Additionally, the seller may be responsible for repairs and other consequences of deferred maintenance if the borrower defaults.
In conclusion, owner financing can be a viable option for both buyers and sellers, but it is important to carefully consider the advantages and disadvantages and consult with a real estate attorney to ensure a mutually beneficial financing contract.
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How to secure a competitive fixed-rate with 10% down
A lower down payment increases the lender's risk, but it doesn't mean you can't secure a good deal. Here are some tips to help you secure a competitive fixed-rate with just a 10% down payment:
Improve your credit score
A strong credit score can help you secure a favourable interest rate, even with a lower down payment. Take steps to improve your credit score before applying for a mortgage, such as paying off existing debts and avoiding new credit cards or big purchases.
Shop around for lenders
Not all lenders will be open to the idea of a 10% down payment. Regional lenders and credit unions may be more willing to work with you than big banks. A mortgage broker in your area may also be able to connect you with the right lenders.
Explore different loan options
Consider different loan options to find the best fit for your financial goals. For example, if you're a first-time homebuyer, you may be eligible for special programs like USDA loans or VA loans, which offer additional benefits and can help lower upfront costs.
Understand the costs
Keep in mind that in addition to the loan amount, you'll need to consider PMI, interest rates, and other related costs. You may also need to account for additional fees, such as funding fees for VA loans or insurance premiums.
Consider mortgage points
Mortgage points, or discount points, are a form of prepaid interest that you can choose to pay upfront in exchange for a lower interest rate and monthly payment. One mortgage point is typically equal to about 1% of your total loan amount.
Lock in your rate
Consider locking in your mortgage rate to guarantee that the interest rate offered to you will remain available for a set period. Most lenders offer a free rate lock for 30 to 45 days. You may need to pay a fee to extend the lock period or to get a "float down" option, which allows you to lower the locked rate if prevailing rates drop.
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Frequently asked questions
Yes, it is possible to get a mortgage with only 10% down, but it may be challenging to find a lender. A lower down payment means a higher loan amount, which can increase your monthly mortgage payments and affect your long-term financial goals.
A lower down payment can provide flexibility for first-time homebuyers, allowing them to purchase a higher-value property without waiting to save for a larger upfront amount. It also ensures that you do not deplete your savings, leaving you with some financial flexibility to handle other commitments or investments.
A lower down payment may result in a higher interest rate and monthly payments. It may also take longer to build home equity compared to higher down payment options. Additionally, with a lower down payment, you are more likely to be required to pay for private mortgage insurance (PMI), adding further costs.
It is recommended to look beyond big banks and explore options with local credit unions or regional lenders. A mortgage broker in your area may also be able to help you find lenders who are willing to engage in such options. Liberty Federal Credit Union, for example, offers a popular 80/10/10 program where you can finance your purchase with 10% down without the added expense of PMI.
