The Basics On Only Putting 3% Or 5% Down To Buy A Home

Black homeownership is in a dismal state. Many Black people struggle to come up with the traditional 20 percent downpayment and feel locked out of owning property.

The homeownership gap between white and Black America is larger today than it was more than 50 years ago. Black homeownership was at 47 percent in the second quarter of 2020, according to data from the U.S. Census Bureau. Black Americans still have the lowest rate of homeownership compared to other racial groups, with white Americans having a homeownership rate of 76 percent, Hispanic Americans at 51.4 percent, and Asian, Native Hawaiian and Pacific Islanders at 61.4 percent, CNBC reported. 

New or first-time buyers with little cash to put down may afford homeownership by putting down a lower percentage towards closing costs — 3-to-5 percent — but they must still compete with cash buyers in a seller’s market.

While lower down payments have advantages such as buying a home sooner, there are also drawbacks such as higher monthly mortgage payments, NerdWallet reported.

It’s a common misconception that you must pay a 20 percent down payment to get a conventional loan. You could qualify for a conventional loan by putting down as little as a 3 percent down payment.

Most conventional mortgages are conforming loans, which means that they meet the requirements to be sold by government-sponsored enterprises such as Freddie Mac or Fannie Mae. Loans that are not insured through the federal government pose a certain risk to lenders since they aren’t guaranteed payment in the event of a borrower default. Therefore, the eligibility requirements for conventional loans tend to be stricter than non-conventional loans. Many Black Americans don’t meet these requirements due to low credit scores, among other things.

But there are 3-to-5-percent downpayment conventional loans with fewer requirements. Typically they include a credit score of 620 or higher, you will need to pay for private mortgage insurance, your debt-to-income ratio (which indicates how much of your income goes to towards debt payments) should be 50 percent or lower; and your loan amount must fall within the loan limits set by Fannie Mae, which at this time is under $510,400, according to Fannie Mae. The Federal National Mortgage Association, commonly known as Fannie Mae, is a U.S. government-sponsored mortgage organization. 

Potential homeowners can go as low as a 3-to-5-percent down payment. It is not as risky as you might think. For borrowers with great credit and a steady income, 3-to-5-percent down loan “can be a financially sound option, allowing you to start investing and building equity sooner,” according to mortgage company Better.com

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An analysis of historical loan data by Laurie Goodman, Jun Zhu, and Taz George at the Urban Institute found that government-backed investors like Fannie Mae see relatively little risk in qualifying mortgage loans with down payments as low as 3-to-5-percent.

“Of loans that originated in 2011 with a down payment between 3-5 percent, only 0.4 percent of borrowers have defaulted. The default rate was exactly the same for loans with slightly larger down payments – between 5-10 percent. The story is similar for loans made in 2012, with 0.2 percent in the 3-5 percent down-payment group defaulting, versus 0.1 percent of loans in the 5-10 percent down-payment group,” according to the Urban Institute.

There are a number of lenders who work with low- and no-down-payment mortgages. Consider a Veterans Administration (VA) loan, backed by the Department of Veterans Affairs. There are also USDA loans, guaranteed by the U.S. Department of Agriculture, which require no down payment to qualified buyers, and FHA loans, insured by the Federal Housing Administration, which require down payments as low as 3.5 percent.

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