One of the most important questions in the pre-qualification process is the down payment.
The traditional down payment in the past has been 20% of the loan amount. First time homebuyers may not have 20% to put down, but that's okay because today, there are 10% down loans, 5% down loans, and 3% down loans.
The most popular low down payment loan is the good old FHA 3.5% down loan that is often called "the first-time buyer loan" even though you don't have to be a first-time buyer to get an FHA loan. The FHA loan is a government backed loan that has a lot of helpful features for borrowers. You can get an FHA loan from any licensed mortgage company. FHA loans are more lax in their qualifications, so it's easier for first-time buyers to qualify for an FHA loan.
Another government backed loan is the VA loan, sponsored by the Veterans Administration for folks who are now, or previously served at least six months in the armed forces. Give the most recent copy of your DD-214 to your loan officer, and he/she can pull a copy of your Certificate of Elegibility for your VA loan. The VA loan is a zero down payment loan that allows you to finance 100% of the price of the house. There are closing costs that are typically 2%-2.5% of the loan amount. Depending on market conditions, it's permissable to negotiate a closing costs credit from the seller to pay some, or all of the closing costs. Also, the interest rates on VA and FHA are typically 1/2% lower than conventional loans.
10%, 5%, and 3% down conventional loans are good options for folks who want to buy a house, but who do not have 20% in cash for a down payment. Banks offer these loans with Private Mortgage Insurance (PMI) that is added to your monthly payment. The lower your down payment, the higher your monthly PMI payment will cost you.
We are currently in a "hot" real estate market in 2021, with house prices rising rapidly because there are not enough houses for sale. Some of our customers have taken a loan with 10% down and PMI. Within a year to 18 months they have acquired more than 10% equity due to higher comparable sold values to their houses (comps). When they get more than 20% equity in their home loan, they can send a request to their mortgage company to eliminate the PMI. It's up to the bank as to whether or not they will drop your PMI at 80% loan to value; federal law requires banks and mortgage bankers to drop PMI when your loan to value reaches 78%.
With all of the loan options in front of you it's easy to get confused. That's why you would want to meet with an experienced mortgage banker BEFORE you meet with a REALTOR; you need to know which loan option will give you the down payment, and monthly payment you can afford. Moreover, mortgage bankers work with a lot of real estate agents, they get to know who are the pros who really know their stuff so that you know who to contact next.
The cost of waiting until you have 20% down to avoid paying PMI can be substantial in a hot market when house prices are skyrocketing monthly. In most situations it's wise to buy now and lock in a good price than waiting until you have a 20% down payment, with no PMI. As house values growing by leaps and bounds, your down payment will also go higher. So it's better to lock in your price and down payment now.