Is a Low Down Payment Ever OK?

Xstatic3333 · March 2014

H and I are finally getting more on the same page about home buying. We are now in agreement on an area, a price range, and that we want to put at least 10% down. We've also agreed that a foreclosure is the best way to satisfy my need for a bargain and his for a good amount of space.

Lately though, there has been a role reversal that has me pondering buying sooner. Tons of foreclosures are hitting the market in our target area that are so affordable that we could put 5% down now and our total housing cost, with PMI, insurance, and taxes, would be less than our current rent. Some specify cash only, but plenty of others are advertising "USDA/FHA eligible!" (though we don't qualify for USDA).

All of the talk of rates going up is also scaring the crap out of me. If we wait, say, 1 year, will we be looking at 6.5% and our 120,000 foreclosures going for 200,000? How quickly will this market turnaround happen?

So,WWMMD? Buy sooner with less down but guaranteed low rates and a very affordable payment, or wait for 10-20% down but risk getting less house? Since I know it's a common question, we do have an e-fund in addition to our DP savings. We also have good credit, though I'd like to take a break from working CC points right before we buy. We probably need to wait until
at least September when I've been at my job for a year, although my employment while in grad school was in my field so some lenders might count it.

Mom987 · March 2014

We have a FHA, and although we've paid down 20% of the value, the PMI is stuck for 5 years (it's been 3.5). Now, I believe FHA keeps PMI for the life of the loan, which I wouldn't want to do. We put down around 5%, too.

Xstatic3333 · March 2014

Mom987 said:
We have a FHA, and although we've paid down 20% of the value, the PMI is stuck for 5 years (it's been 3.5). Now, I believe FHA keeps PMI for the life of the loan, which I wouldn't want to do. We put down around 5%, too.

Gotcha. I believe that's true about PMI for the life of the loan. I always just figured we'd refinance eventually. I've also heard occasional stories of conventional loans with 5-7% down, which I'm hoping our credit could give us a shot at.

Do you have any regrets about putting 5% down or has it worked well for your family? I know every situation is different, I just like hearing everyone's perspective.

jessica490 · March 2014

I think this is an excellent market to buy in and I think you should go for it regardless of your DP. It sounds like that transition would be in your favor.

If we weren't underwater in our condo mortgage we would be buying a house ASAP. So in the meantime, we are going to keep trying to save up for a 20% DP.

Good luck!

hoffse · March 2014

Well you know me... 5% down doesn't particularly scare me, so long as the mortgage is still affordable.

We're going to be putting down 20%, but that's primarily to reduce the mortgage. We're looking at houses that are not at all "starter homes" by most people's definitions because we'd like to stay for at least 10 years, through partnership, and potentially through two kids getting old enough to need separate rooms (If they are of the opposite sex) before we move. So we need more house than the teeny ones, and that means we need to lower our monthly obligation on the mortgage to make it reasonable while we still have our student loans. We could spend a lot less if we were willing to commute, but our time is really valuable to us (both literally and figuratively), so we want to live in-town. That comes with a price tag around here.

I really don't think rates are going to be up to the 6.5% range for awhile. It depends on your lender though. We've about settled on doing the 5/5 ARM through PenFed, which is currently starting at 2.75% and won't go up past 4.75% in the next 10 years (according to the terms of the ARM). 4.75% is still significantly less than 6.5%, and that's the 10-year outlook for the mortgage we're considering. Obviously the starting rate could go up a percentage point in the next year, but that's a pretty big jump. And when interest rates go up, house prices tend to go down a bit.

Our generation has really gotten spoiled by the low interest rate mortgage. When my parents bought their first house in the early 80s, interest rates were 18%. They were able to assume a mortgage at 8%, which was a hell of a deal at the time. Today people would look askance at an 8% mortgage. But that's really average when you look at mortgage rates historically.

I think we're all going to have a conniption when we're looking to buy our second homes and interest rates have finally returned to normal.

So I don't know. Some people are super, crazy "you must have 20% down." I definitely see that side to it, and we're choosing to do it so that we can buy a pretty expensive first house without compromising our travel or student loan prepayment plans. But if 5% down would save you money over your rent, and it would buy you a house you love without compromising your other goals? I see no reason to delay things.

hoffse · March 2014

I would also compare rates for non-FHA loans. There are a lot of lenders that will let you put down 5%. You'll still have to pay PMI, but their starting rates might be lower.

Xstatic3333 · March 2014

Thanks ladies. I should add that the savings over rent is not significant enough to be the decision maker here. My bigger concern is rates and home values rising.

We're pretty set on a cosmetic fixer upper of some sort. I just need this to be a bargain to feel good about it! We're ok with a smallish house with 2BR since we only want one kid, but H really wants spacious common areas so we can entertain, which is fair. He's trying to get me to focus on 1,500 sf or more, though it's hard for me to conceptualize what that really means.

Do you think there is any point in trying to get preapproved before I've been at my job a year? In June I'll know if funding for my position has been extended for five years, and I'd feel comfortable buying at that point.

formerlyGDaisy09 · March 2014

H and I put 5% down 2 years ago, basically for the same reasons, a similar size apartment in our area costs more than our mortgage payment, taxes, PMI, and heating fuel...we were tired of dumping hundreds of dollars into rent each month and not being able to do things like paint the walls a different color or garden.

at this point the housing market has rebounded enough that later this year we're planning to get our home reassessed and see if we can get rid of the PMI (with our loan once we've paid 20% of the selling price or owe less than 80% of the appraised value PMI goes away). right now we've paid the principal down to 90% of what we bought the house for, we're at 86% of the original appraisal and I expect with a few more payments and higher home values we'll be below 80% soon.

Friends of ours just bought a home on the same street that is about the same square footage but doesn't have some of the newer features our home does for 15K more than our appraisal was for. so I have faith that ours will appraise for more later this year.

You may be able to get preapproved before you've been at your job for a year, but you may not be approved for the final loan...June isn't that far away

KatieCutie05 · March 2014

You are going to have to pay PMI even with only putting 10% down but the difference is then you could get a conventional loan a lot easier. Some do still offer conventional for 5% down but your best bet would be to call a mortgage broker and ask. I wouldn't sign up for an FHA the fees are too high. PMI on FHA loans is more then PMI on conventional loans.

http://www.zillow.com/mortgage-rates/buying-a-home/mortgage-insurance-and-pmi/

On conventional loans you can request to cancel pmi once you reach atleast 20% of the value of the home. But if your buying a foreclosure i'm not sure how that works because you should be getting it below what the house appraises for anyway so you'd have to call and ask... call a mortgage broker - dont call one bank. Banks just speak for what they offer, mortgage brokers speak for ALL lenders.

vlagrl29 · March 2014

interest rates will only be going up at this point so I would buy now. 5% is better than nothing.

Xstatic3333 · March 2014

Alright ladies, thanks for all the great advice! I have to admit it was not what I was expecting.

New plan: get it together to start looking right after my workaversary in September. Spend summer de-cluttering current place. Stop using the CCs around July (we always pay them off, don't worry!) Save as much extra as we can in the meantime.

Is there any argument to be made for dialing back my retirement contributions to bulk up the savings quickly?

Katie, thanks for your great suggestions of questions for MBs. I wonder if PMI does work differently for foreclosures.

brij2006 · March 2014

PMI's work the same with foreclosures.

Also, I would try to do what it took to get a conventional loan. FHA loans have quite a few grey areas in them, especially with PMI.

If you're looking at foreclosures, then you may be able to purchase one with less money down because the appraisal comes back higher than what your loan will be for.

We had 20% to put down on our house, but the appraisal came back and we were only financing 70% of the appraised value of the home. So we were able to take our down payment and put it into remodeling the home instead and didn't have to worry about PMI.

If at any point you don't feel like you're getting a good enough house for your money, or you are settling, then wait it out longer and save up more money to put down. Yes, the rates may go up between now and 1-2 years from now, but it's better to put an appropriate amount down than rush into a mortgage because the loan was cheaper.

vlagrl29 · March 2014

Xstatic3333 said:

Alright ladies, thanks for all the great advice! I have to admit it was not what I was expecting. New plan: get it together to start looking right after my workaversary in September. Spend summer de-cluttering current place. Stop using the CCs around July (we always pay them off, don't worry!) Save as much extra as we can in the meantime. Is there any argument to be made for dialing back my retirement contributions to bulk up the savings quickly? Katie, thanks for your great suggestions of questions for MBs. I wonder if PMI does work differently for foreclosures.

Not from me. We stopped contributing to retirement to get a decent E Fund we are comfortable with and will be contributing again late spring. I'm not as strict with money as some of the others on here.

jtmh2012 · March 2014

Xstatic3333 said:

Stop using the CCs around July (we always pay them off, don't worry!) Save as much extra as we can in the meantime. Is there any argument to be made for dialing back my retirement contributions to bulk up the savings quickly?

You don't have to stop using CCs. Just make sure you pay them off in full at the end of each billing cycle. We run about $1500-2000/month through our credit cards and the bank didn't bat an eye at it, but we never carry a balance on them.

As for retirement, I wouldn't. Your biggest asset with retirement accounts is time. By dialing back your contributions you're losing time even if you're able to catch up on what you would have contributed.

short+sassy · March 2014

In your situation, I also think there is nothing wrong with putting only 10% down to get into a home quicker. What really struck me about your story is that your market is getting flooded with cheap foreclosures right now. More supply = better for you. That may not be the case anymore 1-2 years from now.

And, FYI, I bought a foreclosure myself 3 yearrs ago with a conventional loan. I knew I was getting a good deal but, when my appraisal came back $45K more than what I'd bought the house for I was floored! Needless to say, I'm now a big fan of foreclosures, lol.

Xstatic3333 · March 2014

jtmh2012 said:

Xstatic3333 said:

Stop using the CCs around July (we always pay them off, don't worry!) Save as much extra as we can in the meantime. Is there any argument to be made for dialing back my retirement contributions to bulk up the savings quickly?

You don't have to stop using CCs. Just make sure you pay them off in full at the end of each billing cycle. We run about $1500-2000/month through our credit cards and the bank didn't bat an eye at it, but we never carry a balance on them.

As for retirement, I wouldn't. Your biggest asset with retirement accounts is time. By dialing back your contributions you're losing time even if you're able to catch up on what you would have contributed.

That's good to hear! We pay them off in full too. It's a good feeling. I'm actually so paranoid I pay off my purchases weekly, except for work reimbursables.

My concern with the CCs is that H doesn't have that many of them. This is overall a good thing, but when the balance on our shared card is at it's monthly max (usually $400 in a typical month), it makes his utilization look a little high.

KatieCutie05 · March 2014

I doubt retirement would really change your life here. If cutting back is going to get you a significant amount more to avoid pmi completely then it may be a good idea...but if we're talking about only a few hundred a month then don't bother. But if its going to get you over 1k a month then yes it might be worth it to decrease contributions temporarily.

Xstatic3333 · March 2014

KatieCutie05 said:
I doubt retirement would really change your life here. If cutting back is going to get you a significant amount more to avoid pmi completely then it may be a good idea...but if we're talking about only a few hundred a month then don't bother. But if its going to get you over 1k a month then yes it might be worth it to decrease contributions temporarily.

I wish I was giving that much! I give $225 a month to retirement-that's about 10% of my take home. My employer cuts me a check for 5% match. Cutting it out entirely could earn me almost a percent of equity, but I'd want to keep at least 5%. The match is honor system but I don't want to cheat on it.

formerlyGDaisy09 · March 2014

The other note about your retirement (I have no idea how much you have in there). is that in addition to having the down-payment we had to prove that we had access to funds to make the mortgage payment for at least 6 months...we used what we had contributed to retirement for that.

I'm surprised it's so easy for you to change your retirement withholdings, I have to wait until open enrollment to make any changes.

Xstatic3333 · March 2014

Gdaisy09 said:
The other note about your retirement (I have no idea how much you have in there). is that in addition to having the down-payment we had to prove that we had access to funds to make the mortgage payment for at least 6 months...we used what we had contributed to retirement for that.

I'm surprised it's so easy for you to change your retirement withholdings, I have to wait until open enrollment to make any changes.

Hmmm, interesting that retirement counts for that! This is all such great info guys, thank you!

I can only change it so easily because I just have a Roth IRA. My employer is too tiny to deal with having a pretax plan set up.

formerlyGDaisy09 · March 2014

Yes, technically your retirement is money you could access in a pinch (obviously as a last resort). Banks just want to know that if all income were lost you'd be able to keep paying them for a little while until you figured out next steps.

cbee817 · March 2014

A low down payment (5%) was the only way I was able to buy a condo at 22, sell at 26 and buy a house with another low down payment (5%)- sometimes 20% just isn't realistic. We refinanced in 2010 to a 15 year mortgage at 4% and our PMI ended 3 months after we got the refinanced loan. If we sell this one and buy a larger home, we might put 10% down.. I can't really see us sinking 20% into a house that will probably need work/improvements (we like older homes).

emily1004 · March 2014

I'm the minority. Less than 20% is never okay. IMO, if you can't save 20% then you can't afford it. The best time to buy a house is not when it's a buyers market, or when rates are down etc., it's when you can afford to buy a home. You end up spending so much extra with not putting 20% down. I don't believe the "not realistic" excuse, that just sounds like a lack of patience and discipline.

Renting is not throwing your money away. It's giving you a much needed place to live.

I work for a bankruptcy and consumer law firm. I've seen so many people get themselves in trouble this way.

You should make sure before you buy a home, you have:

20% down

Closing cost

Fully funded E-fund

Extra $$ for everything else you need...

ta78 · March 2014

I don't think it's realistic to think everyone can save enough for 20% down, closing costs, fully funded efund, etc.. of course it'd be ideal, but not always possible.

This is completely random and off the top of my head, so hopefully my #s make sense. If I made 40k a year and brought home around 2500 a month, paid 1200 for a 1 bd house/apt and associated bills, 300 for food, 100 for gas, 300 for whatever else.. that leaves 600 for savings. Retirement, efund, down payment, other.. It would take 7-8 years at least. Where I live, rent is usually around 4-500 more than the mortgage payment would be. That's an extra 34k that can be invested, put towards the mortgage, whatever. In a lot of cases, people have less than 600 to put towards savings. You are saying those people should all just rent for the rest of their lives?

hoffse · March 2014

Don't reduce your retirement contributions. PPs are correct that time is the biggest factor. I think we're about the same age (late-20's, right?). Your money doubles, on average, every 7 years, so you want to be putting as much in there as possible while you are young. Of course, being young usually means your contributions are less, but the amount of time you have to them to grow helps counterbalance it.

koosh ball · March 2014

FHA is a horrible mortgage now a days. Do not do it.

Stopping retirement contributions is dumb, really dumb.

I am not totally against small loans against retirement but 'accessing' retirement for a downpayment is just not smart.

A primary house is not an investment... it is an expense. Do not stop putting money in your retirement to buy a house.

emily1004 · March 2014

I did say it was just my opinion, but not everyone should be a homeowner. I'm 33 and buying my first home. We saved for several years. A home is not just a mortgage payment. It's taxes, insurance and upkeep.

It's just what I see every day in the office. People who bit off more than they could chew. It's sad, but in most cases, a little proper planning and responsibility, and it all could of be avoided.

Xstatic3333 · March 2014

Yeah the more I thought about the retirement think you're right, that would be dumb. I let Zillow go to my head a little!

hoffse · March 2014

Houses are absolutely investments - and you can make a lot of money in real estate if you do it right and are willing to ride the market fluctuations until the value of your property has increased. I know plenty of people who buy and sell every 10 years or so, and they usually make money on their houses. I know a few have made a LOT of money on their houses because they are good at picking areas that are about to get hot and buying before it becomes enormously popular.

There are also a lot of people who use their residence as a component of their retirement plan. They "graduate" to a large house in their late 30's/early 40's, retire when they've paid off the mortgage, and then downsize, buying their next (smaller) place cash and pocketing the remainder to invest through their retirement. My grandparents actually did this in the SF bay area and netted over a million AFTER they bought their retirement place. They picked their street really well back in the 60's, and their property skyrocketed in value when Silicon Valley became a thing. The person who bought the house (for $2.3M) actually tore the house down and built this absolutely godawful mcmansion on the lot.

Obviously making that much on a house is very unusual, and I absolutely agree that you shouldn't consider a house that would require you to reduce retirement contributions... but to say that your primary residence isn't an investment is simply incorrect.

Xstatic3333 · March 2014

I think of it as a risky investment. Very risky. I do want to try to be smart about it. I like the idea of buying a fixer upper or foreclosure to get the best return on my investment. At the same time, I know the real estate market's a bit crazy. I guess I think of it as a *small* component of our retirement plan, but don't worry, I won't sacrifice my Roth IRA to it, even for a few months

Mom987 · March 2014

Xstatic3333 said:

Mom987 said:
We have a FHA, and although we've paid down 20% of the value, the PMI is stuck for 5 years (it's been 3.5). Now, I believe FHA keeps PMI for the life of the loan, which I wouldn't want to do. We put down around 5%, too.
Gotcha. I believe that's true about PMI for the life of the loan. I always just figured we'd refinance eventually. I've also heard occasional stories of conventional loans with 5-7% down, which I'm hoping our credit could give us a shot at.

Do you have any regrets about putting 5% down or has it worked well for your family? I know every situation is different, I just like hearing everyone's perspective.

We have never regretted putting so little down, because it didn't feel like a small amount at the time. The mortgage with insurance and taxes was only $200-250 more than a rental home, so for that reason alone we were ready.

Is a Low Down Payment Ever OK?

Re: Is a Low Down Payment Ever OK?

Choose Another Board

Search Boards