As we approach the end of November, there has been an increase in new home construction and builder confidence, while rates remain low and unemployment claims start to rise.
Summary: Folks may have told you not to purchase a home without 20% down in Colorado, but do you really need to invest that much money? Read this helpful article to discover your options and understand what they mean to you.
Do you need to put 20% down Colorado? Based on current sales data, the median home price in Colorado is $408,700 having risen 3.1% in the last year. the Colorado housing market is performing rather well.
You’ve probably always heard you should put 20% down to secure a home mortgage. With that information, it’s a safe bet that the down payment will lie somewhere around $81,783.
Wow, that’s a healthy chunk of change. But don’t lose hope, keep reading to find out why your down payment could be considerably less.
Private Mortgage Insurance
There are a lot of good reasons to put 20% down in Colorado, or anywhere in the U.S. for that matter. For one thing, 20% down in Colorado means not having to pay PMI (Private Mortgage Insurance premiums). Generally speaking, whenever the loan to value ratio of your home is more than 80% PMI will be required. Putting 20% down in Colorado also means lower interest rates which in turn lower the monthly payments, significantly lower.
Fannie May & Freddie Mac Loans
Conventional home mortgages are secured, or “backed,” up to 80% of the total loan value by Freddie Mac and Fannie May in the secondary mortgage market. The secondary mortgage market is simply a reference to the marketplace where lenders and investors buy and sell home mortgages and the rights to service them.
In Colorado and the rest of the United States, most home mortgages are eventually bought or sold in the secondary mortgage market. While you won’t work directly with Fannie Mae or Freddie Mac, your lender must make sure your mortgage follows the guidelines set in place to guarantee coverage against default. In short, if you put less than 20% down on a conforming loan (or one that follows FHFA limits and Freddie Mac / Fannie Mae guidelines), PMI will be required to bridge the gap in coverage.
The reality is that 20% has been the gold standard suggested by Financial advisors for a long time. Why not? A large down payment purchases a certain amount of security. Namely, it buys instant equity.
The Flip Side
It’s nice to have the security purchased with a large down payment. However, it may be completely unrealistic for many buyers. That doesn’t mean that putting less than 20% down is a risky investment, it also fails when held in the opposite light. Big down payments are not necessarily always the best way to go. Either way, you should know a little about your options, and what it takes to qualify for them.
20% Down in Colorado is Not the Only Option
Not everyone can afford a big initial cash investment. The good news is, you may not need to. Several mortgage programs allow for less than a 20% commitment. Let’s compare a few different investment levels side by side to get an idea of how the numbers pan out.
|Location||AVG Home Price||20% DWN||3.5% FHA||3% Min Conv|
It is important here to note, though you will find many similarities in underwriting, each loan program may have vastly different down-payment requirements. As you can see from these few examples, there are several options for well-qualified buyers. But “well-qualified” doesn’t necessarily go hand in hand with a large down payment.
For example, you may have a great salary that has been established for some time however, maybe you don’t have significant savings. In this situation, securing a mortgage that requires PMI with a financial plan to aggressively decrease the LTV below 80% asap may be a good option.
Likewise, maybe you don’t have an amazing salary but you have significant savings. In this scenario, it may be in your best interest to use the savings as a down payment, thereby increasing your purchasing options, reducing your monthly payment and your risk (don’t forget, the more money you put down, the more likely you are to secure the mortgage).
Reduce Your Debt
Here are a few reasons why it might benefit you to make a smaller down payment. The first benefit may be the ability to pay off existing debt. When purchasing a home, it’s a great idea to reduce credit card and other debts you may have accumulated. In addition to helping you qualify for a mortgage, this will help to free you from increased monthly financial commitments and make it easier to afford your home mortgage payments.
Conserve Your Cash
Another obvious take away would be the ability to conserve liquid assets, or in simpler terms, cash. One crucial factor overlooked by many buyers is the need homeownership brings for a substantial emergency fund. Anything can happen, and in this day and age, it generally does. It may be wise to set aside some of your savings and designate it for emergencies like health issues, life changes, job loss, etc.
If you find yourself committed to the idea of a 20% down payment, there is another strategy to consider. With home values in Colorado on the rise, it should come as no surprise that the national association of realtors reported that somewhere around 25% of first time home buyers use cash gifts towards the purchase of a home. That’s right, these days most mortgage programs allow for the practice of third-party gifting. Simply put, gifting is the idea of allowing an outside party to provide for all or a portion of the down payment and or closing costs.
While all loan programs have different requirements for the gifting process, the main thing to remember is that you will be required to supply your lender with what is known as a gift letter. A simple letter from the gift giver stating the fact that the money is a gift, and that there is no expectation of repayment.
When it comes down to it, 20% down in Colorado is only one option when securing a home mortgage. It is vitally important to understand down payments, and how much money you should invest upfront when making purchase decisions.
Need a Mortgage in Colorado?
Do you have more questions about down payments in Colorado? Let the mortgage professionals at Sammamish Mortgage help you understand the ins and outs of down payments and more. Sammamish Mortgage offers a variety of mortgage programs with down payments of different sizes to borrowers across Colorado, Washington, Idaho, and Oregon. If you have questions about securing a mortgage in Colorado, or would like a rate quote, please contact our friendly staff. We look forward to serving you.