Part 1: What is a Low Down Payment Mortgage, How Does it Work, Where to Get it
Part 2: Advantages and Disadvantages of Low Down Payment Mortgages, Should You Get it
Introduction to Low Down Payment Mortgage for Kids and Teens
This video explains the concept of a low down payment mortgage in a simple, concise way for kids and beginners. It could be used by kids & teens to learn about low down payment mortgages, or used as a money & personal finance resource by parents and teachers as part of a Financial Literacy course or K-12 curriculum.
Suitable for students from grade levels:
- Elementary School
- Middle School
- High School
The topics covered are:
- What is a low down payment mortgage
- How do low down payment mortgages work
- Where can you get a low down payment mortgage
- What are the advantages of low down payment mortgages
- What are the disadvantages of low down payment mortgages
- Should you get a low down payment mortgage
What is a low down payment mortgage?
Traditionally, mortgages have required a down payment of around 20% of the home purchase price.
However, a low down payment mortgage is a type of mortgage that requires a much lower down payment – sometimes as low as 3%!
Generally, low down payment mortgages require the borrower to have a good credit score to assure the lender of the borrower’s creditworthiness, so everyone may not qualify.
For example, FHA loans require a lower minimum credit score of 580 and loans from private lenders require a credit score of 620 or higher.
How do low down payment mortgages work?
In a regular mortgage, a lender typically expects a higher down payment to reduce their risk, as the buyer has a sizable stake in the home and is less likely to default.
However, in a low down payment mortgage, the down payment is much lower and the lender assumes a lot more risk since the buyer only puts a small amount upfront.
To compensate for the extra risk, the buyer has to get private mortgage insurance (PMI) and pay a higher rate of interest on their mortgage. While the buyer starts with very little equity in the home, they build equity by making monthly payments – just as with a regular mortgage.
Where can I get a low down payment mortgage?
There are many places to get low down payment mortgages.
One popular option is Federal Housing Administration or FHA loans. FHA gives loans with 3.5% down payment to people with a credit score of 580 and higher.
If you have a credit score of at least 680, you can qualify for government-sponsored enterprise or GSE loans backed by Freddie Mac (Federal Home Loan Mortgage Corp.) or Fannie Mae (Federal National Mortgage Association) with a down payment as low as 3%.
In addition, there are many private lenders that offer loans with down payment as low as 3%, provided you have a credit score of 620 or higher.
What are the advantages of a low down payment mortgage?
Saving up enough money for a down payment is difficult and can take several years. For example, if you are looking to put a down payment of 20 percent on a home worth $300,000, you would need to save $60,000 upfront.
Low down payment mortgages eliminate this problem by requiring a much lower down payment, making the process of purchasing a home faster and easier.
For example, the same house would require only a 3% down payment, or just $9,000 – which is much more manageable.
Any additional savings could be used for other things, like closing costs, home improvements, investing, or creating an emergency fund.
What are the disadvantages of low down payment mortgages?
Firstly, low down payment mortgages usually have a higher interest rate because the lender takes on a higher risk. And depending on the lender, you will also likely need to buy Private Mortgage Insurance (PMI).
You will also need to take out a larger mortgage since you aren’t paying for as much of the home’s value in the form of a down payment.
All these factors combined result in the monthly payments being significantly higher than those for a traditional mortgage with a 20% down payment. And over the life of the loan, you’ll end up paying significantly more in interest.
Also, while there are options for low down payment mortgages, it is certainly easier to find a mortgage with a higher down payment.
You will also start with less home equity to tap into when you get the loan, which means you cannot qualify for a Home Equity loan or a home equity line of credit (HELOC) in an emergency.
Should I get a low down payment mortgage?
Whether you should get a low down payment mortgage depends on your personal financial situation.
If you are able to afford a standard mortgage with a down payment of 20%, you should certainly go for that.
However, if 20% is an impossible goal and buying a home right away makes much more sense than renting, it’s probably better to get a low down payment mortgage.