Image : Joss Woodhead on Unsplash

Yesterday we talked about how much to put down on your first house and what, exactly, mortgage discount points are. Today we’re looking at another mortgage question, specifically this one from somedouche:

How do people buy a house? Specifically, I know multiple coworkers (whom I must assume are making comparable salary and buying comparably priced homes to what I’m looking at) buying houses and only putting two to three percent down and somehow securing a mortgage that doesn’t bankrupt them. Meanwhile, I crunch the numbers over and over, having saved a full 20 percent for my downpayment, and I still can’t seem to find a house with an interest rate or monthly mortgage that seems doable.﻿




Somedouche, it’s not impossible to put two to three percent down on a house, though the average is slightly higher than that—the National Association of Realtors said it was 11 percent in 2016, as I reported yesterday, while Attom Data Solutions put it at six percent. In fact, 20 percent down would be more unusual than three to five percent these days.

If you’re wondering how that’s possible, there’s 1) mortgage insurance, which was a $760 billion industry in 2016, and 2) a variety of programs that require significantly less than 20 percent. In fact, the “20 percent” figure we have in our heads likely stems from the fact that you need PMI for anything below that. But it’s certainly not required, and in fact your money could be better spent elsewhere. “I wouldn’t even recommend putting that much down,” says Mat Ishbia, president and CEO of United Wholesale Mortgage. “Having access to your money is key.”


Ok, two percent is unlikely. But one option is an FHA loan, which requires 3.5 percent down. Credit requirements are less stringent than for other types of loans. You’ll be charged “an upfront mortgage insurance premium of 1.75 percent of the mortgage amount,” per Bankrate, and there are a host of other requirements. But your down payment doesn’t have to be huge. (Bankrate also has a list of some other programs for vets, members of the military and those that qualify for the USDA’s rural mortgage guarantee program.)

Alternatively, borrowers could pay as little as three percent down with private mortgage insurance, which has slightly stricter credit requirements than FHA loans. PMI typically costs 0.5 to one percent of the original loan amount each year, and varies depending on the loan, lender and your credit history. But the boon is you pay less upfront and can either use your leftover funds for sprucing up your new pad or investing in something longterm.

Plus, once you owe less than 80 percent of the mortgage value (in other words, you’ve hit that 20 percent), you can cancel your PMI (as soon as you hit 78 percent, it should cancel automatically). With an FHA loan, you need to refinance to a non-FHA loan to get rid of the insurance.

To get the best rate, find an independent, local mortgage broker, who can help you compare rates and shop around.