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Blog: Do the math – Buying a home now is possible

Posted on by Chloe Plefka

With record low housing supply and high inflation contributing to skyrocketing home prices, the barriers to owning a home may seem insurmountable. But buying a home in a sustainable, affordable way is possible with low down payment mortgage options. First-time and low- to medium-income homebuyers can qualify for mortgage financing without emptying their bank accounts and can keep some cash on hand for home improvements or a rainy-day fund.

Conventional home loans backed by private mortgage insurance (MI) have been available for borrowers for decades and helped nearly 2 million homebuyers in the past year purchase or refinance a mortgage. Private MI is a temporary cost that allows for a down payment as small as 3% of the purchase price. While some borrowers wait until they save 20% for a down payment, the added years of saving can translate to higher interest rates, more expensive home prices and lost home equity.

“Renters who are on the hunt to buy should do the math and consider what is best for them, because often they will find that purchasing with a low down payment mortgage provides buyers with an ability to access the market sooner, and ends up being a significant advantage for them,” said Lindsey Johnson, president of U.S. Mortgage Insurers (USMI).

In today’s market, it could take a family earning the national median income up to 21 years to save 20%, according to calculations by USMI.

If you are one of these renters looking to buy your first home but don’t have 20% down, don’t worry: you are not alone. According to the National Association of REALTORS® (NAR), the typical down payment in 2021 was 7% for first-time homebuyers and 17% for repeat homebuyers.

How can buying now save you money later?

Consider you want to purchase a $375,000 home, the median sales price for a single-family home in 2021, according to NAR. A 5% down payment is $18,750 versus $75,000 for 20% down. With a 740 credit score at today’s MI rates, your monthly MI payment would be about $157, which is included in your monthly mortgage payment until the MI can be canceled, usually after five years once you reach 20% equity in the home.

Due to robust home price appreciation (HPA) that came in at 17.5% for 2021, today’s $375,000 home will likely cost more in the years ahead. This will also have an impact on the necessary down payment and length of time required to save for it. There are other variables in the equation too, such as interest rates. As interest rates rise, so too can the cost of mortgage financing.

Not all low down payment mortgages are the same. Importantly, government-backed loans insured by the Federal Housing Administration (FHA) require at least a 3.5% down payment, an upfront charge that must be paid at closing or added to your loan balance, and the monthly insurance is permanent for the life of the loan.

There are many online mortgage calculators that can help. Check out lowdownpaymentfacts.org to learn more.