Is a 20% Downpayment Required

Notes from a Mortgage Lender:
I just received a call from a customer inquiring about a residential mortgage. Her impression what that she needed to put down a minimum of 20% downpayment. My response was, did you know that to buy a residential property you do not need to put 20% down payment?

It is a common myth and misconception that most people think they need to meet a 20% down payment requirement. I let this customer Imagine the time to save that money for the down payment, lender fees, attorney fees, escrows, and reserves. If the market dictated 20% down payment many would miss out on buying sooner rather than later. Instead, they would continue to be on the sidelines paying in many cases, a very high monthly rent. I want to educate people that yes, you can purchase a home, and can begin the first step by reaching out to ask quetsions, even if it is informational.

This customer was excited to know that the minimum downpayment was between 3% to 5% downpayment on all owner-occupied properties. I introduced myself as residential mortgage loan officer Steve Roussel at Salem Five Bank. She told me the Purchase Price for the Two-family home was $700,000. I told her the minimum downpayment was only 3%. She was relieved to it was not mandatory to put a 20% down payment on a $700,000 purchase. The difference in down payment is $21,000 versus $140,000!

I let the customer know that the minimum middle fico score was between 580 and 620 FICO score. On occupied property on a 2 to 4 family property. I communicated to the borrower a lower down payment could mean you're able to buy a home earlier, rather than how much 􀆟me would it take to save for a 20% down payment. Second, she could spend less on the down payment, she would be free to cover other expenses such as school loans, car loans, moving expenses and other regular ordinary daily expenses. Third, she could use money for repairs, improvements, furniture, durable goods like wash machines, stoves, snowblowers and maintenance. The tradeoff was that she would payment a low monthly premium of private mortgage insurance. Private mortgage insurance is the cost per month to allow people to put 3%, 5%, 10%, 15%, down payment without putting the full 20%. Once the loan amount is less than 78% loan to value this cost would automatically go away with conventional loans. The private mortgage insurance once eliminated would lower the monthly payment. There is a program that the borrower pays a one-time up-front cost to buy out of private mortgage insurance. If the customer could negotiate to have the seller pay to pay a one time cost upfront to eliminate month private mortgage insurance. Or the customer could get a gift from family member to give them to pay the private mortgage insurance, down payment in their closing cost. The gift money needs to come from an immediate family relative coming in from a secure source.

This customer liked the lower down payments because she was financially stable and makes a good amount of money, where she did not need to put all their savings in, which would deplete a lot of available money causing her to be house poor. She liked the idea to put in less money and have other money for reserves for other things that they would want to do or buy. This customer wanted to put less down payment to buy a higher priced home.

I told this customer traditionally most sellers would prefer to work with borrowers who have 20% or more down payment. But I had another op􀆟on. In today's market, I’m a mortgage loan officer that can pre- approve a customer for a mortgage and on request I can work with a customer further to give them a pre commitment letter that substitutes a cash offer. Sellers perceive that the larger down payment generally means a less risky borrower. But in today's environment the pre commitment letter has a borrower approved subject to a purchase and sales agreement, appraisal, and title insurance. The pre-commitment letter is a game changer. In today's market you can be pre-approved within 24 to 48 hours and receive are commitment letter within 48 to 72 hours when all conditions are signed off by an underwriter. I did let this customer know that it is recommend that she work with a Realtor and a Buyers Attorney to protect the her interest.

The customer and I went over a lot of information by telephone call. She asked me if she could apply online at her convenience for a low downpayment and receive the precommitment letter since she worked all day and could not come to my office. I let her know she could call me on my cell or text number 617-686-7988 or email me at steven.roussel@salemfive.com . I told her not to worry. I would send to her an online application by text or email.