If there is one misconception that comes up time and time again when it comes to buying a home, it's the belief that you need to have 20% down to buy a home. This couldn't be further from the truth.
But let's look at where this 20% myth comes from, and why 20% is still an important number.
First, we need to understand how mortgages work.
In Florida when you purchase a home with a mortgage you are borrowing money from the bank and pledging your house as security in the event that you don't repay the loan.
As this illustration on the right shows, your home's value is split between your equity in the home, and your mortgage balance.
Let's say you buy a house worth $100,000.
You put down $20,000 and take a mortgage for $80,000. In this case, you have 20% equity or $20,000 in equity. The other $80,000 you'll pay back, with interest, typically over 30 years.
Here's the thing though, the bank doesn't want to wait 30 years to make money off of your loan. They only have so much money to lend, and they need to get the money they lent you back as quick as possible so they can lend it to another home owner. This is where the secondary mortgage market begins.
You've probably heard of Fannie Mae and Freddie Mac. These names were thrown around quite a bit on the news back during the housing crash in 2008.
Here's what you need to know about them:
They're both Government Sponsored Entities who "buy" your mortgage from the bank.
This helps make sure there is plenty of money available for banks and lenders to loan to homebuyers. However, Fannie Mae and Freddie Mac will only buy loans if they are "conforming" which means that the loans meet their standards.
These standards include the size of the loan, the creditworthiness of the borrower and their ability to repay among other factors.
The other important factor that comes into play is the size of the down payment. Typically, if a buyer is putting down less than 20%, they will need to purchase Private Mortgage Insurance. This can be paid for either upfront or in the form of a monthly premium. Typically you will only need to carry this policy until you have 20% equity in the house.
So what are your options if you want to buy without putting down 20%?
Take a conventional mortgage with as little as 3% down and pay Private Mortgage Insurance until you reach 20% equity. (Speak to your lender about your options)
Take out an FHA Loan with as little as 3.5% down. This is a loan insured by the Federal Government which offers reduced mortgage insurance. However, you must carry this insurance throughout the life of the loan.
Take out a USDA Loan in qualifying areas with as little as $0 down. These loans also must be insured, but the USDA allows you to roll this insurance into the loan amount so you can pay it off over the period of the loan.
Look into down payment assistance through The City of Tampa, Hillsborough County, and State of Florida available programs.
As you can see there are plenty of loan options available to you that don't involve putting 20% down. We'll dive into each of these a bit deeper as we get into further hacks in this guide.
The most important thing to get your loan process going is to find the right lender. There are plenty out there, but I'd recommend speaking to your Realtor first to see if they have any recommendations.
Hopefully you found this guide useful in your Tampa area home search. If you have any questions on this process, feel free to contact Stephen Dispensa of Real Broker LLC. and Tampa Real Estate Secrets:
Licensed Real Estate Sales Associate
Real Broker, LLC.
Tampa Real Estate Secrets