Your Questions Answered
At Ashlar, I firmly b that an educated home buyer or seller is best equipped to make their own decisions. That’s why I take time out of my day each and every day to answer someone’s real estate question. And, when I think the answer can be useful to you as well, I share it here. So without further ado:
Realtor here. First, you don’t need to do FHA as a first time buyer, nor do you need FHA to get less than 20% down. There are plenty of conventional loans that go all the way down to 0% down, though 1%-5% is what I typically see.
Many sellers do not prefer FHA because there are additional hurdles and obstacles to overcome during the contract process, and in the current market they will usually get cash or conventional offers.
So you really need to investigate your conventional options. There is also a wide variety between loans on what exactly is due at signing, and you are able to fine tune that for your financial situation.
For instance, even though you may only have to buy 5% down, many loans still require closing costs to be paid at closing, as well as prepaying income tax and homeowner’s insurance for 12- 18 months.
Obviously this can add up quick!
Other loans you can roll certain things up into the loan if cash to close is your primary concern.
These reasons are why it’s critical to get prequalified and sort out the loan with a mortgage broker (preferred) or bank / credit union way before you go and look at your first house.
Plus as an added bonus, they can usually tell you some things you can do to help you lower your rate or points in the time between now and putting the offer together.
To address your second point, every loan with a down payment under 20% has to have some sort of protection or insurance.
Mortgage insurance is roughly 1% of the loan amount left per year, and can be removed usually when equity rises above 20%. So many folks who bought a year or two ago could remove their mortgage insurance now if they follow the process.
Even VA loans have a fee whose purpose is to protect against hte low down payment default. It’s structured a little differently, and they call it a Funding Fee, but its purpose is the same.
Conventional loans are no exception.
If your Loan to Value is more than 80%, meaning you are putting less than 20% down, then you will be paying mortgage insurance in some way shape or form.
The only way I know to avoid mortgage insurance is to pay more than 20% down, buy it outright with cash, or have a friend or family member loan you the money on a private note or mortgage.