The 20-percent myth is a common one. While it’s true that a 20 percent down payment is required to avoid private mortgage insurance (PMI) with conventional mortgage loans, it’s not a loan requirement. PMI protects a lender in the event of foreclosure, and because of it, otherwise qualified buyers can get approved for a conventional mortgage loan without a 20 percent down payment.
Conventional mortgages are private-sector loans not backed by the government. If the borrower fails to repay the loan, the lender is on the hook. With a Federal Housing Administration loan, the government protects the lender in the event of default. This insurance for lenders enables them to accept higher risk applicants, such as borrowers who contribute lower down payments, often no more than 3.5 percent.
Another option that requires a lower down payment is a piggyback or 80-10-10 mortgage, which consists of three parts. There’s the first or main mortgage loan, which is usually for 80 percent of the sales price. The next piece is a second mortgage for 10 percent of the sales price. It’s also referred to as a second mortgage, home equity line of credit or home equity loan. The final part is your 10 percent down payment.
There are drawbacks to the 80-10-10 loan: You pay closing costs on both loans; the second loan will have an adjustable rate; and you’ll need a higher credit score than other low-down payment options, such as a Federal Housing Administration loan.
Are any of these options right for you? The best advice is to put together documentation of your financial situation and talk to a lender. He or she will know if a conventional, FHA or other mortgage is appropriate for you.