20% Down Payment is Not the Law!

Many times I meet people who want to buy a home and have everything they need but one thing: 20% down payment.  Potential buyers, especially first time homeowners, may not have saved the traditional 20% down.  But did you know there are other viable options?  They range from a Federal Housing Administration (FHA) loans of 3.5% down to a conventional loan (Fannie Mae/Freddie Mac) with 3%-10% down.  If you are a Veteran, you may qualify for no money down through a VA Loan.  Some of the loan programs allow for part or all of the down payment to be a gift from relatives, employers, or close friends. Some programs allow for the sale of documented personal property to be counted as the down payment.

Of course your monthly payments will be higher because of a higher loan amount and most lenders will charge private mortgage insurance, a VA funding fee, etc. on top of the loan amount.  However, this may not be the end of the world for some buyers.  Here are three reasons why it may be advantageous to put less than 20% down:

1. Total payments may still be less than rent: With the high rent in Los Angeles and expecting to climb, you may still be saving money in comparison.
2. Buy now, refinance later: There are no limits as to how many times you can refinance your home.  If the numbers make sense and your property increases in value, then you might be able to refinance, removing the mortgage insurance and saving money.  Some buyers, including myself, did this by buying a fixer with 10% down, then refinancing, saving me approximately 10% off of my monthly mortgage.
3. You are in the real estate game, rather than chasing it: Assuming values continue to go up, the longer you wait the more you will have pay as a down payment and monthly payments. That means that one time you saved up $40,000 to buy that $200,000 condo is now worth $250,000, and you need to come up with another $10,000.  That also means the monthly payments are going up with a larger principal balance and it may be the same or more as if you are paying the lower amount with mortgage insurance.

Knowing that buying real estate is generally a long term strategy, the first step is to buy and get in the game.  Of course the numbers have to work, talk to your accountant or financial adviser, and then to a licensed real estate agent to establish the best strategy for you.