“The best news is for buyers who will see more options to choose from, increased negotiating power and reduced time pressure.”
Fran Lisner Real estate agent at Daniel Gale Sotheby’s
For most of 2023, the housing market was stuck in neutral. Rising mortgage rates weighed on both supply and demand, causing home sales to plummet.
And for a while, it seemed like mortgage rates could climb indefinitely. But mortgage rates started to reverse course in November, and suddenly, the outlook for the 2024 housing market was striking a more positive tone.
While lower mortgage rates won’t entirely crack the ceiling of what’s still a historically unaffordable housing market, 2024 is expected to be more balanced, with the potential for higher inventory and slightly lower home prices, according to Fran Lisner, real estate agent with Daniel Gale Sotheby’s. “The best news is for buyers who will see more options to choose from, increased negotiating power and reduced time pressure,” Lisner said.
As we kick off the year, prospective homebuyers are wondering what’s in store for them. We talked to several experts about their housing market predictions and top tips for today’s homebuyers. Here’s what they had to say.
Read more: Mortgage Predictions: Could 2024 Be a Better Year for Homebuyers?
10 expert tips for buying a home in 2024
While experts are cautiously optimistic about the direction of the housing market in 2024, buying a home (especially if it’s your first time) is rarely a pain-free process. From tracking market conditions to the actual process of getting a mortgage, there are a lot of moving parts.
1. Follow what housing market experts are saying
Housing market trends are dynamic and, oftentimes, hard to understand, especially when it comes to all the factors that affect mortgage rates (the list is longer than you think).
That’s why housing market experts and economists are constantly tracking economic data to better understand where things are headed. Keeping an eye on what those experts are saying, whether by reading newsletters or listening to podcasts, can help you become a more informed buyer without getting too deep into the macroeconomic weeds.
Here are some of the podcasts I listen to that help me stay in the loop.
2. Monitor mortgage rates regularly
In 2023, mortgage rates kept climbing until they passed 8% in early fall. But soon after, rates started to trend down for the first time in months. As inflation slows and the Federal Reserve initiates interest rate cuts, experts predict mortgage rates will eventually reach 6% by the end of 2024.
“Rates are down over 1% since peaking in October, and with the Fed done with their rate hikes, we expect rates to keep falling for the next few months at least,” said Greg Heym, chief economist at Brown Harris Stevens.
But mortgage interest rates are volatile, making them difficult to predict. And while tracking mortgage rate movement isn’t the most exciting thing to do, there’s a reason experts recommend it: It can save you a lot of money and free up some room in your homebuying budget.
Your interest rate doesn’t only affect your monthly mortgage payments. It also affects the total interest you’ll pay over the course of your loan. Securing a lower rate from the beginning, even if by a few tenths of a percentage point, can save you tens of thousands of dollars over time.
Read more: Compare Current Mortgage Rates
3. Create a homebuying budget
If you haven’t already, start budgeting for your down payment and other costs associated with a home purchase, like closing costs.
The minimum down payment required by most lenders is 3% for conventional loans. But experts often recommend making a down payment closer to 20% of the property’s asking price. That way, you can take out a smaller loan and avoid having to pay private mortgage insurance.
Many lenders will approve you for a loan larger than what you need or can comfortably afford. But that means taking on more debt. “Shift from asking, ‘How much could I borrow?’ to ‘How much should I borrow?’” said Matt Vernon, head of consumer lending at Bank of America.
When creating a budget, you want to make sure you can cover your future monthly mortgage payments as well as any other debt you have, like student loans or credit card debt. At CNET, we recommend the 28/36 rule: Allocate no more than 28% of your pre-tax monthly income toward housing-related expenses and keep your total monthly household debt below 36% of your gross income.
CNET’s mortgage calculator can give you a good idea of what your future mortgage payments might look like based on a few specifics, like your credit score, projected down payment and interest rate.
Read more: How Much House Can I Afford?
4. Be flexible about location
Between 2020 and 2022, home prices saw double-digit growth. In 2023, the pace of growth slowed but prices were still up around 3% on an annual basis. Forecasts from Redfin and Realtor.com show home prices easing in the second half of 2024, but not dramatically — between 1% and 1.7%.
“I don’t predict many bargains out there because you don’t go from zero inventory to an overflow of available homes on the market, which is when you would see a substantial price drop,” said Dottie Herman, vice-chair at Douglas Elliman Real Estate. That means we won’t see any major home price declines in 2024, according to Herman.
But what real estate is doing on a national level might not reflect what’s happening in your neck of the woods. Home prices and housing supply vary by city and state, so it’s always worth looking at less expensive markets. In markets where inventory is especially tight, like New York, prices are expected to increase by 3% in 2024. Meanwhile, prices in the Austin, Texas, metro area are projected to fall by around 12%.
5. Get ahead of the competition
Many prospective buyers are sitting on the sidelines as they wait for mortgage rates to fall and affordability to improve. As mortgage rates inch lower over the course of 2024, experts expect that pent-up homebuying demand will lead to increased competition.
“If 2024 becomes a turnaround year for housing, my suggestion would be to get all of your financing straightened out and in shape, and then start looking right away before the weather changes and you are joined by competition,” said Herman. “That’s when bidding wars start, so you want to be ahead of them.”
Buying sooner rather than later, if you have the option, could grant you more negotiating power while the pace of home sales is still slow, according to Afifa Saburi, capital markets analyst at Veterans United Home Loans.
6. Consider new-home construction
Limited housing inventory is directly related to the lack of home sales: Because the majority of current homeowners have mortgage rates below 5%, they haven’t been eager to list their homes and give up their bargain interest rates for today’s higher rates.
While experts are split on how much the inventory of existing homes will increase in 2024, there is a silver lining: New construction. “Single-family construction has offered relief from scarce existing inventory conditions over the last year,” said Hannah Jones, senior economic research analyst at Realtor.com.
If supply is limited in your area, consider what new-home construction is (or will be) available this year. Buying a newly constructed home comes with a few benefits. For starters, a new home will be move-in ready and likely more energy-efficient than an older home.
Brand-new homes can often be more affordable. As a way to incentivize buyers, many home builders have been offering discounts and rate-buydowns — when you (or a seller) pay money upfront to a lender in exchange for a lower interest rate. Experts say those incentives will continue into 2024.
7. Interview multiple real estate agents
The right real estate agent can make a big difference in your homebuying journey. You want someone with good communication skills, connections and experience, but the most important thing is an agent with in-depth knowledge of your market who can help you develop the right approach, said Joseph Castillo of Compass Real Estate.
An agent familiar with your area can tell you how realistic your budget is or even point you to more affordable neighboring areas. Start by contacting several local real estate agents to discuss your needs and concerns before settling on one.
8. Explore your loan options
If cost continues to be a barrier, see if you qualify for government-backed loans or down payment assistance programs.
“While increased demand is pushing up home prices, there are loan options and grant programs for those who may be able to afford monthly mortgage payments but struggle with the upfront costs,” said Vernon.
FHA loans, VA loans and USDA loans tend to offer lower credit score and down payment requirements than conventional loans. States also provide different types of housing assistance, either through grants or interest-free loans. Check with your state or local housing authority, real estate agent or lender to find out what you may qualify for.
Read more: These 8 First-Time Homebuyer Programs Can Save You Money on Your Mortgage
9. Shop around for mortgage lenders
No matter what’s happening in the market, one step you should never skip is shopping around for mortgage lenders. Researching and comparing offers from multiple lenders will help you find someone aligned with your financial picture and save you a lot of money on your mortgage.
Mortgage interest rates and fees vary widely across lenders. That’s why experts recommend getting at least three loan estimate forms from different lenders to compare the cost of borrowing and potentially negotiate a lower mortgage rate or better loan terms.
10. Prepare to wait
If 2024 isn’t your year to buy a home, that’s OK. You can do plenty of things while you wait to put yourself in a better position when you’re ready to buy.
Improve your credit score. Your credit score is one of the main factors lenders consider when determining whether you qualify for a mortgage and at what interest rate. The minimum credit score for conventional loans is 620, but to qualify for the lowest rates, you’ll want to aim for closer to 740. Paying your credit cards on time (ideally, in full) and staying below your credit limit are great places to start.
Pay down debt. Lenders also take into account your debt-to-income ratio, or DTI. Paying down debt will lower your DTI, which means you’ll be able to borrow more — and at a better rate. As an added (and significant) bonus, it will also relieve a major financial burden and give you more room to save for long-term goals, like your down payment.
Save for a down payment. It can take a long time to save up enough cash for a down payment, but you can start small with weekly or monthly savings goals. Consider stowing your cash in a high-yield savings account or certificate of deposit (if you don’t plan to buy in the immediate future) to take advantage of compounding interest.
Is it worth buying a home in 2024?
Experts are optimistic that a combination of falling mortgage rates and slightly lower home prices will give homebuyers more options than last year. But a variety of other issues — like low inventory — are weighing on affordability. Ideally, the affordability crisis will ease and the housing market will stabilize, but that is unlikely to happen in just one year. Though 2024 might not seem like the best year to buy a house, the perfect time should be determined by your financial circumstances and long-term goals.
“Buyers often ask me if it’s the right time to make a purchase. It is, but only if you’re prepared,” said Castillo.
Mortgage rates dropped 6 basis points from last week even as the benchmark 10-year Treasury yield hit its highest point in over a month, Freddie Mac reported.
The 10-year Treasury has been on the rise since last week’s inflation report. However mortgage rates can be influenced by other factors, including secondary market pricing.
Mortgage rates now above 6% should fall below that level by the end of the year, Fannie Mae’s January housing forecast, which was also issued this morning, declared. Furthermore, that government-sponsored enterprise backed off its call for a recession this year.
Instead, the U.S. will have positive economic growth, albeit below the normal trend, Fannie Mae forecast.
Freddie Mac’s Primary Mortgage Market Survey for Jan. 18 put the average for the 30-year fixed rate loan at 6.6%, versus 6.66% one week prior and 6.15% for the same time in 2023. It is the first decline in the rate in three weeks.
The 15-year FRM, which had declined in recent weeks, continued its slide, falling 11 basis points to 5.76% from 5.87%. A year ago, it was at 5.28%.
This is the lowest level for mortgage rates since May, Freddie Mac said.
“This is an encouraging development for the housing market and in particular first-time homebuyers who are sensitive to changes in housing affordability,” said Sam Khater, Freddie Mac’s chief economist in a press release. “However, as purchase demand continues to thaw, it
will put more pressure on already depleted inventory for sale.”
But on Jan. 18, the 10-year Treasury rose as high as 4.13%, a level not seen since Dec. 13, 2023, when it peaked at 4.19%. The yield closed at 3.98% on Jan. 11. That suggests there are mixed signals in the market.
The 30-year FRM should nevertheless reach 5.8% in the fourth quarter of 2024, and fall further to 5.5% by the same quarter next year, and that should boost refinance production, said Doug Duncan, Fannie Mae’s chief economist, in a press release. This compared with 6.5% and 6.1% in his December economic outlook.
“However, even at less than 6%, we think rates will still have a significant way to go in order to meaningfully reduce the ‘lock-in effect’ experienced by homeowners who refinanced or bought during the pandemic,” Duncan said. “Overall, we expect 2024 to be a better year than 2023 for homebuyer affordability and the mortgage industry.”
Duncan boosted his refinance forecast for 2024 versus December by 9% to $490 billion from $451 billion. The 2025 refi prediction now calls for $752 billion of refis, up from $686 billion in December.
The purchase mortgage outlook was also boosted for this year and next, to $1.49 trillion and $1.69 trillion respectively, from $1.43 trillion and $1.62 trillion in December. Total volume in 2024 is now expected to reach $1.98 trillion and for 2025, $2.44 trillion.
Duncan also dropped his estimate of 2023 total volume to $1.53 trillion to just under $1.5 trillion.
There are many steps to the homebuying process. If you’re taking out an FHA loan (a loan backed by the Federal Housing Authority) to buy a property, you’ll most likely need to get an appraisal to verify the value and condition of the home. Let’s take a closer look at how FHA appraisals work, what to expect, and how to prepare as a homebuyer.
Understanding FHA Appraisals
An FHA loan appraisal is an in-person assessment performed by an accredited appraiser. The purpose of the appraisal is to evaluate how much a house is worth and determine if it meets minimum safety and livability standards. The appraisal is sent to the lender for further evaluation before a FHA loan can be approved. FHA appraisals are typically required whether the borrower is buying or refinancing a home with an FHA loan. 💡 Quick Tip: Don’t have a lot of cash on hand for a down payment? The minimum down payment for an FHA mortgage loan is as low as 3.5%.1
Differences Between FHA and Conventional Appraisal
Whether a borrower is seeking an FHA loan or a conventional loan, an appraisal estimates the fair market value of a home based on the property condition and nearby home values. But FHA loans must meet the minimum standards set by the U.S. Department of Housing and Urban Development (HUD). This means that FHA appraisals also consider the health and safety of the property, while conventional appraisals focus on the property’s value and condition. FHA lenders may require that any health and safety hazards be addressed before approving the mortgage.
Role of FHA Appraiser and Their Requirements
FHA appraisers follow HUD guidelines for minimum property standards. During the appraisal, they analyze and report a property’s physical and economic characteristics to provide an opinion of its value. HUD requires FHA appraisers to have state certification and meet the minimum certification criteria issued by the Appraiser Qualification Board.
First-time homebuyers can prequalify for a SoFi mortgage loan, with as little as 3% down.
How Do FHA Appraisals Work?
An FHA loan appraisal involves two steps. The appraiser will complete a site visit to inspect the property condition and perform market research for comparable homes in the area to estimate the market value of the home.
The appraiser will inspect the home’s interior and exterior to determine the property’s safety and soundness. The appraiser’s findings, plus information on the home like square footage and the year it was built, are cataloged in HUD’s Uniform Residential Appraisal Report.
To estimate the property’s value, the appraiser evaluates the selling prices for comparable homes in the same area that were recently sold. This information, combined with the property’s condition and characteristics, is used to estimate the market value.
Recommended: The Ultimate Home Inspection Checklist
What’s the Purpose of an FHA Appraisal?
FHA appraisals are required by lenders to ensure that the loan amount doesn’t exceed the market value of the property. The appraisal process is also used to determine that a property meets FHA standards for health and safety.
Differences Between Appraisal vs. Home Inspection
The appraiser only factors in readily observable conditions. A home inspection, by comparison, is much more in-depth in its assessment of a property’s need for repairs.
Besides the property value, the criteria evaluated during an FHA appraisal include the safety, security, and soundness of a home. In other words, the home should be safe for occupants to inhabit, protect the security of the property, and not have physical deficiencies or conditions impacting the structural integrity and ability to market it for future sale.
Appraisers are required to describe the property conditions, including any renovations, necessary repairs, or deterioration. Minor issues, such as missing handrails, cracked windows, or worn countertops, do not require automatic repair.
Safety and Structural Standards
In terms of occupant health and safety, the FHA appraisal looks out for exposure to hazardous materials, such as lead paint and asbestos. Mold, radon gas, and poor insulation are other potential safety risks that would be flagged in an appraisal. The overall property structure needs to be in sufficient condition to keep occupants safe. This means that damage to the foundation, structural decay, or anything that impacts the long-term integrity of the home would not meet FHA requirements.
Compliance with Minimum Property Standards (MPS)
FHA appraisals follow the Minimum Property Standards (MPS) set by HUD. The MPS establishes baseline conditions to cover aspects of a property that aren’t met by model building codes. For example, the MPS covers doors, gutters, and wall coverings to ensure the property value is not impacted by the quality of these components.
What to Expect from an FHA Appraisal
Being prepared for an FHA appraisal can help streamline the loan application and homebuying process. Here’s what to expect from an FHA appraisal:
Appraisal Timeline and Duration
The duration of an FHA appraisal site visit varies by property size and condition, but plan for it to take between one and several hours to complete. The full appraisal report is usually complete within a week.
Common Issues That Can Affect the Appraisal Outcome
There are a number of issues and property conditions that the FHA requires to be remedied for loan approval. Some common issues include:
• Roof condition or damage
• Exposed wires
• Water heater temperature and pressure relief valve
• Damaged foundation
• Peeling paint (for homes built before 1978)
Conditions That Won’t Pass FHA Inspection
It’s important to know what won’t pass the FHA inspection. Any property conditions that impact the safety and health of occupants could need to be addressed in order to get FHA loan approval. Besides the common issues outlined above, hazards, nuisances, and obstructions to property access could fail to pass FHA inspection. For example, the level of traffic or proximity to a hazardous waste site could violate FHA standards.
Factors That Can Affect Property Valuation
Property valuation accounts for the home condition, square footage, any renovations, and the number of bedrooms and bathrooms. The appraiser must observe neighborhood characteristics and surrounding properties to make determinations that will be incorporated into the valuation of the property.
FHA Inspection Checklist and Tips
Sellers can plan ahead and fix what won’t pass FHA inspection to avoid delays and improve the marketability of their home. Here’s how to address some common issues that could cause a property to fail an FHA appraisal.
• Roof repair: Fix leaks and consider a new roof if life expectancy is less than three years.
• Chipped or peeling paint: Scrape and repaint peeling surfaces if property was built prior to 1979.
• Water heater: Ensure the water heater has a pressure and temperature relief valve and sufficient piping.
• Plumbing: Repair all toilets, showers, and sinks that aren’t in working order as leaky plumbing won’t pass FHA inspection.
Both the inspection and the home’s appraised value are critical to FHA loan approval. Sellers and their real estate agents are permitted to communicate with an appraiser to offer additional property information that can contribute to the valuation of the home. Gathering documentation beforehand on any home improvements can ensure the appraiser has everything needed for an accurate valuation.
Recommended: What Are the Most Common Home Repair Costs?
What Happens After an FHA Appraisal?
The FHA appraisal report will provide the estimated market value and outline any required repairs or alterations that need to be completed for FHA loan approval.
What to Do if the Home Sale Appraisal Comes Back Low
If an FHA appraisal comes back low, there are several possible scenarios. The seller can lower the sale price to accommodate the appraised value. Alternatively, the buyer can renegotiate to lower the price and potentially contribute a larger down payment to cover the portion of the home price that is not covered by the FHA loan. As a last resort, a buyer would be permitted to walk away from the deal if the FHA lender’s requirements can’t be met.
What to Do if the Refinance Appraisal Comes Back Low
If refinancing with a FHA loan and the appraisal comes back low, there are a few courses of action available to borrowers. First, review the appraisal report to see if an appraiser missed anything important. If so, providing the correct information to get another appraisal could result in a higher appraised value.
If disputing the appraisal isn’t an option or successful, borrowers can consider restructuring the loan to take less cash out. Finally, the loan can be denied if the terms are not beneficial to the borrower.
What to Do if the Appraiser Requests Further Repairs
The appraisal may identify repairs that need to be completed to close on the loan. Unless otherwise outlined in the purchase and sale agreement, sellers are typically on the hook for repairs. The sellers have up to 120 days to make necessary repairs and meet FHA standards if required by a lender.
Alternatively, buyers can pay for the repairs themselves. If the issues impact the health, safety, and livability of the property, they’ll need to be completed prior to closing. Other non-safety repairs can be completed after closing. Note that delayed repairs may require an extra escrow holdback for the estimated costs.
Once repairs and issues have been addressed, the property can be reassessed. Borrowers can consider a FHA 203(k) loan to finance both the purchase and rehabilitation costs through a single loan if the repairs are an obstacle to closing. Buyers might consider renegotiating their offer to reflect the repair costs being financed.
If appraisal-related issues are delaying closing, buyers can consider a mortgage rate lock to secure their interest rate for a set period. This can help buy more time for repairs to be made without losing out on favorable loan terms.
What to Do if the Appraisal Comes Back at or Higher Than the Expected Amount
The loan simply moves forward if the appraisal comes back at or higher than the expected amount, barring any request for further repairs.
How Long Is an FHA Appraisal Good For?
FHA appraisals are valid for 180 days unless it’s updated. If updated, an appraisal can be good for up to one year.
The FHA appraisal influences loan approval in two key ways. First, the appraisal evaluates the property condition and identifies if any repairs or further inspections are required for loan approval. Second, the appraised value determines the total loan amount a buyer is approved for. If the appraised value is lower than the purchase price on the contract, either a price reduction or larger down payment could fill the gap to get loan approval.
How Long Do You Have After Appraisal to Close an FHA Loan?
Repairs aside, how long can you wait after the appraisal to close on an FHA loan? It helps to understand how long an FHA appraisal is good for. Once the borrower and lender receive a copy of the FHA appraisal, it’s valid for 120 days. However, borrowers can request a 30-day extension to allow more time to close on a FHA loan.
A conditional approval from the lender will outline the required repairs to be made in order to close. After the appraisal is approved in underwriting, the loan will most likely be cleared to close. Prior to closing, borrowers will receive a mortgage closing disclosure which outlines the total funds needed to close. 💡 Quick Tip: When house hunting, don’t forget to lock in your home mortgage loan rate so there are no surprises if your offer is accepted.
The Takeaway
FHA appraisals estimate a property’s value and assess its condition to determine if it meets safety and livability standards set by HUD. Understanding the conditions and issues that won’t pass FHA inspection is important for buyers and sellers alike.
SoFi offers a wide range of FHA loan options that are easier to qualify for and may have a lower interest rate than a conventional mortgage. You can down as little as 3.5%. Plus, the Biden-Harris Administration has reduced monthly mortgage insurance premiums for new homebuyers to help offset higher interest rates.
Another perk: FHA loans are assumable mortgages!
FAQ
How does the appraised value affect the loan amount?
With FHA loans, the appraised value of the property determines the loan amount a borrower can qualify for.
Can you contest an FHA appraisal?
Yes, you can contest an FHA appraisal and provide additional information to inform the property valuation. However, there’s no guarantee that the appraiser will change the valuation.
What happens if the property doesn’t meet FHA requirements?
If a property doesn’t meet FHA requirements, buyers can ask the seller to make the necessary repairs. Alternatively, buyers can consider other types of home loans, such as a conventional mortgage.
Photo credit: iStock/valentinrussanov
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¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Buying a home is an exciting milestone, but it comes with its fair share of financial responsibilities, including the often-misunderstood closing costs. These costs are a vital part of your home purchase budget and can significantly impact your financial planning as a new homeowner.
Far from being just a trivial detail, closing costs encompass a range of fees and charges that, when understood correctly, can help you make more informed decisions and potentially save money in your home-buying journey.
Here’s everything you need to know about mortgage closing costs to avoid any last-minute surprises.
Who Pays the Closing Costs: Buyer or Seller?
When it comes to closing costs in a home purchase, the question of who pays what is often a topic of negotiation and varies by transaction. Generally, both buyers and sellers have their own set of fees to handle, but the exact distribution can differ.
Your mortgage lender is required to provide you with an estimated breakdown at multiple points in the loan process. The loan estimate outlines the estimated closing costs and lists out all the different fees, as well as who is responsible for paying them.
Buyer’s Responsibility
Typically, the buyer shoulders a significant portion of the closing costs, which can include:
Loan-related fees (such as application and origination fees)
Appraisal and inspection fees
Initial escrow deposit for property taxes and mortgage insurance
Title insurance and search fees
Seller’s Contribution
Sellers commonly pay for:
Real estate agent commissions
Transfer taxes and recording fees
Any homeowner association transfer fees
Room for Negotiation
It’s important to note that these are not hard and fast rules. In many cases, closing costs are a point of negotiation in the sale agreement. For example, in a buyer’s market, a seller might agree to cover a larger portion of the closing costs to attract buyers. Conversely, in a seller’s market, the buyer might take on a larger share to make their offer more appealing.
Case Example
Imagine you’re buying a home priced at $300,000. The closing costs, amounting to approximately 3% of the purchase price, would be around $9,000. As a buyer, you might agree to pay $6,000 of this, covering most of the loan-related fees and escrow deposits. The seller, in turn, might handle the remaining $3,000, covering their portion of fees like the agent’s commission and transfer taxes.
Comprehensive List of Fees Associated with Mortgage Closing Costs
Mortgage closing costs can be broken down into a few different categories: lender fees, real estate fees, and mortgage insurance fees.
Lender Fees
These fees may vary depending on the lender you choose. Here’s a basic rundown of each closing cost to give you an idea of what you can expect.
Application fee: Covers processing your mortgage loan application and obtaining your credit report.
Attorney fee: In some states, an attorney must review the mortgage paperwork; fees vary and can be hourly or a flat rate.
Broker fee: If using a mortgage broker, they typically charge a commission, usually between 1% and 2% of the home’s purchase price.
Origination fee: The origination fee compensates the lender for administrative tasks and is typically around 1% of the loan amount.
Discount points: Paying points upfront can lower your interest rate; each point equals one percent of your loan amount.
Prepaid interest: Covers the interest that accrues between the closing date and the first mortgage payment.
Recording fee: Charged by local governments for recording the mortgage documents; it covers the administrative costs of maintaining public records.
Underwriting fee: Charged for the underwriter’s services in evaluating and preparing your loan; includes costs like due diligence and legal fees.
Real Estate Fees
Real estate fees are related to costs surrounding the property itself. Some are one-time fees, while others are recurring.
Appraisal fee: Necessary to assess the market value of the home. Costs vary, but typically around $500 to $600, payable before the appraisal or at closing.
Property tax: Generally an annual or biannual payment. Most lenders require at least two months’ worth pre-paid into an escrow account at closing.
Homeowners’ insurance policy: An annual premium required for a home loan. The first year’s premium is often paid at closing, with subsequent payments included in your mortgage.
Title search and insurance: Ensures the property is lien-free. Lender’s title insurance protects the lender, while owner’s title insurance safeguards the buyer.
Transfer tax: Imposed by governments when a property is sold, usually a percentage of the sale price.
HOA fees: For properties in a homeowners association, this may include a transfer fee and potentially the first year’s annual assessment.
Mortgage Insurance Fees
When you pay less than 20% of your home purchase price as part of your down payment, you’re usually required to pay mortgage insurance. Your private mortgage insurance (PMI) premium is typically assessed as a monthly fee within your mortgage payment. However, you may also have some costs at closing.
Upfront mortgage insurance fee: Depending on your loan type and lender, you may have to pay an additional application fee for a loan with mortgage insurance. Additionally, some loans require that you pay a one-time fee at the time of closing on top of your annual fee throughout the mortgage.
Government-backed loan fees: If your loan is from the FHA, USDA, or VA, then you may have extra mortgage insurance fees if your down payment is under 20%. FHA loans require an upfront mortgage insurance premium (MIP) of 1.75% and a monthly fee. The VA and USDA don’t charge mortgage insurance, but instead have guarantee fees. VA fees fall between 1.25% and 3.3% while USDA fees are a flat 2%.
Understanding How Closing Costs Are Calculated
That list may seem huge and overwhelming. However, before making an offer on a house, you can estimate your closing costs using some shortcuts. Average closing costs are usually about 2% – 6% of the loan amount.
Let’s look at that in real numbers.
Say you buy a home for $200,000. You can realistically expect your closing costs (not including your down payment) to extend anywhere between $4,000 and $10,000. That’s a pretty big range, so use that as a starting point when you begin to compare loan offers.
But don’t wait until you’ve fallen in love with a house to financially plan for closing costs.
Instead, use an online closing costs calculator early in the process to get a more specific estimate. You will want to use real information like average property taxes in your area and the costs associated with your type of loan.
A good mortgage lender can walk you through the variables, including how different loan types affect your closing costs.
Strategies for Reducing Closing Costs: Negotiation Tactics
Negotiating closing costs can be an effective way to reduce the financial burden of buying a home. While some fees are fixed, others offer room for negotiation. Here are strategies and insights to help you lower these costs:
Understand What Can Be Negotiated
Identify which fees are negotiable. These often include certain lender fees like the origination fee, broker fees, and some third-party charges. Knowing what can be adjusted is the first step in negotiation.
Compare and Shop Around
Before settling with one lender, shop around. Get Good Faith Estimates from multiple lenders and compare their closing costs. This can give you leverage in negotiations, as lenders are often willing to offer competitive pricing to win your business.
Ask the Seller to Contribute
In some real estate markets, it’s common for buyers to ask sellers to cover a portion of the closing costs. This is particularly feasible in buyer’s markets, where sellers are motivated to make the sale.
Look for Lender Credits
Some lenders offer credits in exchange for a slightly higher interest rate on your loan. These credits can be used to offset closing costs. While this increases your long-term interest cost, it can significantly reduce upfront expenses.
Negotiate with Service Providers
For services like home inspections and title searches, you have the option to choose your provider. Shop around and negotiate with these providers for better rates.
Review the Closing Disclosure Form
Before closing, you’ll receive a Closing Disclosure form listing all the fees. Review it carefully and question any fees that seem off or weren’t previously disclosed. Sometimes, errors can be corrected, leading to lower costs.
Time Your Closing
By scheduling your closing towards the end of the month, you can reduce the amount of prepaid interest you’ll need to pay.
Seek Legal or Financial Advice
Consider consulting with a real estate attorney or a financial advisor. They can provide valuable advice on which costs can be cut and how to negotiate effectively.
Options for Financing Your Closing Costs
In some cases, you can roll your closing costs into the mortgage, but you have to meet some basic requirements. First, it depends on your type of loan, since not all loans allow you to do this. Most government-backed loans, like FHA and USDA loans, do offer the possibility to add them into your home loan.
What’s the downside to this idea?
A higher loan amount means a higher monthly mortgage payment and a larger amount of interest paid over the life of your mortgage. Furthermore, your new home needs to appraise for the higher amount you want to finance. Plus, your debt-to-income ratio needs to be able to support that larger payment to qualify for such a loan.
If you’re getting a loan that doesn’t allow for closing costs to be rolled into the mortgage, you can still get around it. However, you must meet those criteria we just talked about.
Simply ask the seller (through your real estate agent) to pay for closing costs in exchange for paying the extra amount as part of the purchase price. Here’s an example.
If your $200,000 offer is accepted, but closing costs are $5,000, ask the seller to contribute $5,000 and change your offer to $205,000. At the end of the day, the seller still walks away with the same amount of money.
Again, this strategy is contingent upon the numbers working for you, your financial situation, and your mortgage application.
Finalizing Payment: Methods to Cover Your Closing Costs
When you finally get to closing day, it’s almost time to relax and move into your new home. But first, don’t forget to set up a way to pay closing costs.
You can ask your lender or settlement company for the preferred payment method. However, in most cases, you can either get a cashier’s check from your bank or set up a wire transfer. There’s usually a minor fee associated with each one. It’s a quick and easy process, but it shouldn’t be forgotten before you get to closing.
Conclusion
Closing costs are a crucial aspect of buying a home. Being well-informed and prepared for these expenses can make a significant difference in your financial planning. Remember, while some fees are fixed, others offer room for negotiation, and shopping around can lead to potential savings.
By factoring in these costs from the start, you can ensure a smoother, more predictable home-buying experience. Buying a house is a major step – financially and personally. Approach it with the right knowledge, and you’ll be set to make this important decision with confidence and peace of mind.
Frequently Asked Questions
What is an escrow account, and how does it relate to closing costs?
An escrow account is a third-party account where funds are held during the process of a transaction, like buying a home. Regarding closing costs, part of these costs often includes initial deposits into an escrow account for future property taxes and homeowners’ insurance. This ensures that there is enough money set aside to cover these recurring expenses.
Can closing costs be included in the mortgage loan?
In some cases, closing costs can be rolled into the mortgage loan. This is more common with certain types of loans, like FHA loans. However, including closing costs in the loan increases the total loan amount and, consequently, your monthly mortgage payments and the total interest paid over the life of the loan.
Are there any tax benefits related to closing costs?
Yes, certain closing costs can have tax benefits. For example, points paid to lower your interest rate may be deductible in the year you buy your home. Always consult a tax professional to understand how your closing costs might affect your taxes.
How can first-time homebuyers prepare for closing costs?
First-time homebuyers should start saving early for closing costs, which typically range from 2% to 6% of the home purchase price. It’s also helpful to research and understand the different types of fees involved in closing costs, and consider attending homebuyer education courses for more detailed information.
What happens if I can’t afford closing costs?
If you find that you can’t afford closing costs, there are a few options. You can negotiate with the seller to pay some or all of the costs, look for lender credits, or explore programs available for first-time buyers or low-income buyers that offer assistance with closing costs.
There are many steps in the homebuying process, not least of which is deciding what type of mortgage to use. Comparing two common mortgage categories — a loan backed by the Federal Housing Administration (FHA) vs a conventional loan — is a smart place to start. This may be especially true for first-time homebuyers, who often find it challenging to save a substantial amount of money for a down payment.
Understanding FHA Loans and Conventional Mortgages
Buying a home is often the largest investment of a lifetime. It’s important for borrowers to understand how the FHA loan vs conventional loan decision could impact their interest rate, loan terms, and minimum down payment. Eligibility requirements also vary between different types of home mortgages. Let’s examine how each loan type works, plus the factors to consider when deciding between an FHA vs a conventional loan.
💡 Quick Tip: SoFi’s Lock and Look + feature allows you to lock in a low mortgage financing rate for 90 days while you search for the perfect place to call home.
What Is an FHA Loan?
An FHA loan is a government-backed loan that’s issued by a lender, such as a bank or credit union, but insured by the Federal Housing Authority (FHA). FHA loans offer low down payment options, as well as flexible income and credit guidelines. For a first-time homebuyer, it may be easier to secure an FHA loan than a conventional mortgage, although it’s always worth exploring both options.
What Is a Conventional Mortgage?
Conventional loans are not insured by the government. They typically have stricter borrower requirements than FHA loans but can cost less over the life of the loan.
Basic Eligibility and Application Process for Each
There are some key differences in eligibility requirements between these two popular mortgage types. Eligibility for FHA and conventional loans is based in part on financial factors like credit score and debt-to-income ratio (DTI). Additionally, FHA loans can only be used for a primary residence and require borrowers to occupy the property within 60 days. Buyers can typically have only one FHA loan at a time, unless they meet specific exceptions.
Applying for either type of home loan involves many of the same steps of the mortgage preapproval process. With either mortgage type, lenders may ask borrowers to submit information on the property they’re purchasing and documentation of income, assets, debts, and employment.
First-time homebuyers can prequalify for a SoFi mortgage loan, with as little as 3% down.
Recommended: The Mortgage Loan Process Explained in 9 Steps
FHA vs. Conventional Loans: Key Distinctions
In a head-to-head FHA vs conventional loan comparison, it’s worth noting some key distinctions. The minimum down payment, credit requirements, insurance, loan limit, and property eligibility varies between each loan type. Here’s how it looks:
Down Payment Requirements and Differences
Pitting an conventional loan vs. an FHA loan will show you how much money you need to put down on a house. (To get a good sense of how much home you are prepared to buy, use a home affordability calculator.) The minimum down payment for FHA loans is 3.5% for borrowers with at least a 580 credit score and 10% for borrowers with credit scores between 500-579. Meanwhile, conventional loans can offer down payments as low as 3% for a fixed-rate loan, or 5% for an adjustable-rate mortgage.
Credit Score Requirements and Impact on Approval
Lenders will look at your credit score with either loan type. Borrowers can secure an FHA loan with a credit score of 500, though as noted above, this requires a down payment of 10% versus just 3.5% with a credit score of 580 or higher. Conventional loans have stricter credit requirements — borrowers will typically need a credit score of at least 620 to qualify.
Mortgage Insurance: PMI vs. MIP
Mortgage insurance premiums (MIPs) are required with an FHA loan. This includes an upfront payment equivalent to 1.75% of the loan and an annual premium that’s spread across monthly mortgage payments. MIP runs for the full loan term or for 11 years if a borrower puts 10% or more down. With a conventional loan, buyers who put less than 20% down will need private mortgage insurance (PMI), which is paid monthly with the mortgage payment.
Loan Limits and Property Eligibility
The amount you can borrow and the condition and intended use of the property are key factors when deciding between an FHA vs. conventional loan. FHA loan limits are set annually by the U.S. Department of Housing and Urban Development (HUD). For 2024, the limit for single-family residences is $498,257 for low-cost areas and $1,149,825 for high-cost areas. The limits increase for two-, three-, and four-unit properties. In 2024, the conventional loan limit for single-family properties is $766,550 in low-cost areas and $1,149,825 in high-cost areas.
Property eligibility also differs by loan type. FHA loans involve stricter appraisals that consider safety and building codes, not just the home’s value. Additionally, conventional loans can be used for a second home while FHA loans are limited to primary residences.
Interest Rate Variations
Interest rates are influenced by several factors, including a borrower’s income, credit score, down payment amount, and the overall state of the economy. Because FHA loans are backed by the government, they generally have more competitive interest rates compared to conventional mortgages.
Benefits and Drawbacks of FHA Loans
Lower Down Payment but with Mortgage Insurance Premium
For borrowers with credit scores of 580 or higher, the ability to put as little as 3.5% down is a key reason for choosing an FHA loan. But FHA borrowers pay MIP, regardless of the down payment amount.
Recommended: Private Mortgage Insurance (PMI) versus Mortgage Insurance Premium (MIP)
Flexible Credit Requirements
In terms of credit score, FHA loans are easier to qualify for than conventional loans. FHA loans require a credit score of 580 to put 3.5% down or 500 to put 10% down.
Property Eligibility and Restrictions
FHA loans are intended for primary residences, so they can’t be used for vacation homes or investment properties. The appraisal process for FHA loans is also more strict than for conventional loans. The FHA appraisal assesses the property value and the home condition to ensure it meets minimum property standards set by HUD. These extensive standards cover design, as well as building materials such as insulation.
Interest Rate Variability
FHA loans usually have lower interest rates since lenders incur less risk with government-backed loans. Interest rates vary by lender, so it’s worth shopping around to compare options, whether you are considering an FHA or a conventional mortgage.
Advantages and Disadvantages of Conventional Mortgages
Opting for a conventional loan vs FHA loan comes with a mix of potential benefits and drawbacks.
Higher Down Payment but No Upfront Mortgage Insurance
Though borrowers could qualify for a conventional loan with a 3% down payment, a higher down payment is more common. The average down payment on a house is 13%, although younger borrowers and first-time buyers often put down less than this. Borrowers can choose to put 20% down on a conventional loan to avoid the cost of private mortgage insurance.
Stricter Credit Score Requirements
The minimum credit score to qualify for a conventional loan is 620, though this can vary by lender.
Property Eligibility and Restrictions
Conventional loans don’t have the same occupancy requirements as FHA Loans. This allows borrowers to purchase a variety of property types, including primary residences, vacation homes, and investment properties.
Interest Rate Stability and Flexibility
There are two types of conventional loans: fixed-rate and adjustable-rate. The former has the same interest rate for the loan term, offering predictability and stability. Adjustable-rate mortgages, on the other hand, tend to have a lower introductory rate for several years before the rate fluctuates based on market conditions. This can provide upfront savings at the onset of the mortgage.
FHA Loan vs. Conventional: Costs Comparison
When comparing FHA loans vs conventional loans, it’s worth considering the monthly payment and overall cost over the life of the loan with each option. For home buyers with a good credit score, a conventional loan may be more attractive. That’s because conventional loan costs are more dependent on your credit score and down payment amount than FHA loan costs. And as a result, your monthly payments and PMI are lower when your credit score is higher. This is a key difference from how FHA loans work.
Upfront and Monthly Costs for Mortgage Insurance
FHA loans require paying MIP for 11 years or the life of the loan depending on the down payment amount. MIP also involves an upfront cost that’s equal to 1.75% of the loan amount. The ongoing cost of MIP is between 0.45% and 1.05% annually, divided across monthly payments.
With a conventional loan, borrowers pay PMI, which typically ranges from 0.5% to 2% of the total loan amount annually. The cost of PMI depends on the borrower’s credit score, loan-to-value (LTV) ratio, and other factors. Borrowers can stop paying PMI once the mortgage balance is at 78% of the home’s original value or current value following an appraisal. For borrowers with stronger credit, PMI with a conventional loan can cost less than MIP with an FHA loan
Interest Rates and Overall Loan Costs
Though FHA loans can offer more competitive rates and be less expensive in the short-term, borrowers with strong credit could save in the long-term with a conventional loan. Once borrowers get out of PMI on a conventional loan, the annual percentage rate (APR) — the annual cost of the loan — may be lower than an FHA loan.
Down Payment Impact on Immediate and Long-Term Finances
If you can afford to put 20% down on a conventional loan, you’ll avoid the upfront and ongoing cost of PMI. Putting more money down could translate to a lower interest rate, providing further savings on monthly payments and long-term finances.
Increasing your down payment on an FHA loan to 10% can reduce the duration of paying MIP to 11 years and potentially lower the interest rate. However, borrowers who can afford a higher down payment may save more with a conventional loan since PMI can be canceled sooner.
FHA vs. Conventional Loans: Eligibility and Qualification Criteria
Borrowers have to meet certain eligibility requirements to qualify for either an FHA or a conventional loan. Generally, FHA loans are easier to qualify for, but they have stricter property eligibility requirements than conventional loans.
Qualifying Credit Scores for FHA and Conventional Loans
To qualify for a conventional loan, borrowers typically need a credit score of 620 or higher. Meanwhile, borrowers could qualify for an FHA loan with a credit score of 500 if they put 10% down. Borrowers with a 580 credit score can put just 3.5% down.
Down Payment Requirements for Both Loan Types
The minimum down payment for a conventional loan is typically 3% if it’s a fixed-rate mortgage or 5% if it’s an adjustable-rate mortgage. However, the down payment requirement can vary based on a borrower’s financial situation, loan amount, and type of property. FHA loans require either a 3.5% or 10% down payment depending on a borrower’s credit score.
Property Eligibility and Loan Limits
FHA loans can only be used for primary residences, while conventional loans apply to a primary residence, vacation home, or investment property. For 2024, FHA loan limits for single-family homes are $498,257 (in low-cost areas of the U.S.) and $1,149,825 (in high-cost areas). Conventional loan limits for single-family properties are $766,550 in low-cost areas and $1,149,825 in high-cost areas. Buyers who want to purchase a property that exceeds these limits will need to consider a jumbo mortgage loan.
FHA Loan vs. Conventional: Which Is Right for You?
There’s no one-size-fits all solution for buying a house. When deciding between FHA vs conventional loans, the right choice depends on your finances, your long-term financial goals, and the property type you wish to purchase.
Factors Influencing the Choice
Your credit score and ability to make a down payment are key considerations when weighing conventional loan vs FHA loan. If you have a lower credit score or a higher debt-to-income (DTI) ratio, an FHA loan could be a better bet for its flexible credit requirements and more competitive interest rate. However, borrowers with strong credit could qualify for a conventional loan with a down payment of just 3%.
Long-Term Financial Considerations
FHA loans can be more affordable upfront due to lower interest rates and down payment requirements. But borrowers will be on the hook for paying mortgage insurance for the full loan term unless they put 10% down or refinance later on.
If you’re able to qualify for a conventional loan and put 20% down on a house, not having to pay private mortgage insurance can save money in the long run. Conventional loans also offer more flexible repayment terms, whereas FHA loans are either 15- or 30-year mortgages.
Flexibility in Property Choices
FHA loans require occupancy within 60 days and the property must be the borrower’s primary residence. These loans also have strict rules for property conditions. For instance, a manufactured home built prior to 1976 is not eligible for an FHA loan. On the other hand, conventional loans can be used for second homes and a greater range of property types.
💡 Quick Tip: If you refinance your mortgage and shorten your loan term, you could save a substantial amount in interest over the lifetime of the loan.
The Takeaway
Deciding between an FHA loan vs a conventional loan depends on your specific financial situation and the property type. An FHA loan could be a better option if you have a higher DTI ratio, lower credit score, or less money to put toward a down payment. Whereas a conventional loan could be a better fit if you have strong credit and can afford a larger down payment.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% – 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It’s online, with access to one-on-one help.
SoFi Mortgages: simple, smart, and so affordable.
FAQ
What are the main differences between FHA and conventional mortgages?
FHA loans are insured by the Federal Housing Administration, whereas the lender assumes the risk for a conventional loan. For the borrower, an FHA mortgage typically has a lower credit-score requirement. It may also allow a lower down payment than some conventional loans.
Can I qualify for both an FHA loan and a conventional mortgage simultaneously?
It is possible to qualify for both an FHA loan and a conventional mortgage simultaneously. Note that lenders will look at your finances closely to ensure you can afford both loans.
How does property type affect the choice between FHA and conventional loans?
FHA loans are restricted to primary residences, while conventional loans can be used for second homes, such as investment properties or vacation homes. FHA loans also have stricter property condition requirements compared to conventional loans.
Photo credit: iStock/FotoDuets
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SoFi Mortgages Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.
*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
+Lock and Look program: Terms and conditions apply. Applies to conventional purchase loans only. Rate will lock for 91 calendar days at the time of preapproval. An executed purchase contract is required within 60 days of your initial rate lock. If current market pricing improves by 0.25 percentage points or more from the original locked rate, you may request your loan officer to review your loan application to determine if you qualify for a one-time float down. SoFi reserves the right to change or terminate this offer at any time with or without notice to you.
¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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Our experts answer readers’ home-buying questions and write unbiased product reviews (here’s how we assess mortgages). In some cases, we receive a commission from our partners; however, our opinions are our own.
Last year, it seemed like rates would never stop climbing, with 30-year mortgage rates reaching a more than two-decade high in October 2023. Now rates are much lower, but they’re still relatively high compared to pre-pandemic levels.
The good news is that mortgage rates should go down in 2024, with some forecasts predicting they’ll drop close to 6% by the end of the year. The not-so-good news is that as rates go down, houses are probably going to get more expensive.
The latest housing market predictions for 2024 see home prices rising this year as lower mortgage rates drive an increase in homebuying demand. High mortgage rates have kept a lot of would-be buyers out of the market over the past couple of years. Once rates fall, all that pent-up demand is going to be unleashed on a market that doesn’t have anywhere near enough inventory to meet it.
This will push home prices up. But that doesn’t necessarily mean it will be impossible to buy in 2024, or that prices will spike dramatically everywhere. There will still be opportunities for many buyers to carve out some affordability in this market.
For cash-strapped first-timers who are hoping to buy in 2024, things like down payment assistance and first-time homebuyer loans can make homeownership more affordable, even as prices rise.
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Mortgage Calculator
Use our free mortgage calculator to see how today’s mortgage rates would impact your monthly payments. By plugging in different rates and term lengths, you’ll also understand how much you’ll pay over the entire length of your mortgage.
Mortgage Calculator
$1,161 Your estimated monthly payment
Total paid$418,177
Principal paid$275,520
Interest paid$42,657
Paying a 25% higher down payment would save you $8,916.08 on interest charges
Lowering the interest rate by 1% would save you $51,562.03
Paying an additional $500 each month would reduce the loan length by 146 months
Click “More details” for tips on how to save money on your mortgage in the long run.
30-year Fixed Mortgage Rates
The average 30-year fixed mortgage rate was 6.66% last week, according to Freddie Mac. This is a four-basis-point increase from the previous week.
The 30-year fixed-rate mortgage is the most common type of home loan. With this type of mortgage, you’ll pay back what you borrowed over 30 years, and your interest rate won’t change for the life of the loan.
The lengthy 30-year term allows you to spread out your payments over a long period of time, meaning you can keep your monthly payments lower and more manageable. The trade-off is that you’ll have a higher rate than you would with shorter terms or adjustable rates.
15-year Fixed Mortgage Rates
Last week, average 15-year mortgage rates were 5.87%, a two-basis-point decrease from the previous week, according to Freddie Mac data.
If you want the predictability that comes with a fixed rate but are looking to spend less on interest over the life of your loan, a 15-year fixed-rate mortgage might be a good fit for you. Because these terms are shorter and have lower rates than 30-year fixed-rate mortgages, you could potentially save tens of thousands of dollars in interest. However, you’ll have a higher monthly payment than you would with a longer term.
When Will Mortgage Rates Go Down?
Mortgage rates started ticking up from historic lows in the second half of 2021 and increased over three percentage points in 2022. Rates also increased dramatically last year, though they’ve been trending back down in recent months.
As inflation comes down, mortgage rates will recede as well. Most major forecasts expect rates to trend down throughout 2024.
For homeowners looking to leverage their home’s value to cover a big purchase — such as a home renovation — a home equity line of credit (HELOC) may be a good option while we wait for mortgage rates to ease. Check out some of our best HELOC lenders to start your search for the right loan for you.
A HELOC is a line of credit that lets you borrow against the equity in your home. It works similarly to a credit card in that you borrow what you need rather than getting the full amount you’re borrowing in a lump sum. It also lets you tap into the money you have in your home without replacing your entire mortgage, like you’d do with a cash-out refinance.
Current HELOC rates are relatively low compared to other loan options, including credit cards and personal loans.
How Do Fed Rate Hikes Affect Mortgages?
The Federal Reserve increased the federal funds rate a lot last year to try to slow economic growth and get inflation under control. Inflation has come down a lot in response to this, though it’s still a little bit above the Fed’s target rate of 2%.
Mortgage rates aren’t directly impacted by changes to the federal funds rate, but they often trend up or down ahead of Fed policy moves. This is because mortgage rates change based on investor demand for mortgage-backed securities, and this demand is often impacted by how investors expect Fed hikes to affect the broader economy.
Fed hikes have pushed mortgage rates up over the last two years. But the Fed has indicated that it’s likely done hiking rates and could start cutting in 2024. Once the Fed cuts rates, mortgage rates should fall even further.
While the dream of homeownership might seem elusive on a tight budget, the availability of low income home loans offers a beacon of hope.
These specialized loans come in handy, particularly when the obstacles of saving for a down payment loom large—a common hurdle if you’re already strapped with rent payments.
So if you’re wondering how to bridge the financial gap between renting and owning, read on to explore the various low income home loan programs that could unlock the door to your future home.
Verify your home buying eligibility. Start here
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Can I buy a house with low income?
Yes, you can buy a house with a low income by qualifying for housing assistance programs and special mortgage loans. That’s because there is no minimum income requirement to buy a house.
However, your ability to do so will depend on a variety of factors specific to your financial situation. A mortgage lender will examine your credit score, debt-to-income ratio, and down payment to determine if you qualify.
Check your mortgage eligibility. Start here
What are low income home loans?
The path to homeownership can be fraught with challenges, particularly for those with limited financial resources. Enter low income home loans—a specialized type of mortgage designed to level the playing field for buyers facing financial barriers.
Low-income mortgage programs focus on addressing the common challenges that low-income earners encounter, such as managing debt, maintaining less-than-stellar credit scores, and struggling to save for a significant down payment.
Verify your home buying eligibility. Start here
Minimal down payment requirements: One of the most daunting aspects of buying a home is accumulating a large down payment. Low income home loans often require smaller down payments, making it easier for buyers to make the initial leap.
Lenient credit criteria: Having a perfect credit score is not always feasible, especially when living on a limited income. These loans often have more flexible credit requirements, allowing for a broader range of credit histories.
Reduced costs at closing: High closing costs can be another hurdle. Low income home loan programs may offer reduced or even waived closing costs in certain circumstances.
Competitive mortgage interest rates: High interest rates can quickly make a mortgage unaffordable. Low income home loans often feature competitive interest rates, reducing long-term costs.
Lower mortgage insurance premiums: Some programs offer reduced premiums for mortgage insurance, further lowering monthly payments.
Interestingly enough, some of these programs often have income caps, essentially barring applicants who have incomes that are considered too high. This ensures that the programs benefit those who need them most.
Requirements for low income home loans
Your ability to qualify for a loan is not solely based on your income. Lenders will assess your debt-to-income (DTI) ratio, a key metric that represents your monthly debts as a percentage of your monthly income. Generally, a DTI under 35% is viewed as favorable, making you a more appealing candidate for a mortgage.
If saving a down payment is your chief concern, don’t worry; there are plenty of options that require minimal, or sometimes zero, down payments. Despite common misconceptions, a 20% down payment is not a universal requirement.
Additional Assistance
Beyond the loan itself, there are various homebuyer assistance programs that can help with the down payment and closing costs. Some of these are structured as grants that don’t require repayment, making it easier to achieve the dream of owning a home.
Navigating the complexities of mortgages and home buying can be intimidating, but low income home loans and assistance programs offer a lifeline to those who dream of owning their own home. These financial products and services are tailored to alleviate the most common obstacles, offering a viable path to homeownership for those who may have thought it was out of reach.
Low income home loans
Low income home buyers have plenty of loan options and special assistance programs to help with a home purchase. Here’s what you can expect.
Check your mortgage eligibility. Start here
Loan Type
Credit Score
Down Payment
Unique Requirements
HomeReady
Generally 620
As low as 3%
Income limits based on area, homebuyer education course required
Home Possible
Generally 660
As low as 3%
Must be primary residence, income limits may apply, can include 1-4 unit properties
Must be a qualifying service member, veteran, or eligible spouse; primary residence only
USDA Loans
Usually 640
No down payment required
Must be in a qualifying rural area, income limits apply, primary residence only
HomeReady and Home Possible mortgages
Fannie Mae’s HomeReady program and Freddie Mac’s Home Possible loan are geared toward lower-income home buyers. You need only 3% down to qualify, and there is no minimum “required contribution” from the borrower. That means the money can come from a gift, grant, or loan from an acceptable source.
Even better, the home seller can pay closing costs worth up to 3% of the purchase price. Instead of negotiating a lower sales price, try asking the seller to cover your closing costs.
Private mortgage insurance (PMI) may also be discounted for these low income home loans. You’re likely to get a lower PMI rate than borrowers with standard conventional mortgages, which could save you a lot of money from month to month.
“This is the biggest benefit,” says Jon Meyer, The Mortgage Reports loan expert and licensed mortgage loan originator. “The PMI is offered at a lower rate than with a standard conventional loan.”
Finally, Home Possible and HomeReady might make special allowances for applicants with low incomes. For instance, HomeReady lets you add income from a renter on your mortgage application, as long as they’ve lived with you for at least a year prior. This can help boost your qualifying income and make it easier to get financing.
You might qualify for HomeReady or Home Possible if your household income is below local income limits and you have a credit score between 620 and 660.
FHA loans
FHA loans offer flexible approval requirements for repeat and first-time home buyers alike. This program, which the Federal Housing Administration backs, relaxes borrowers’ standards to get a mortgage. This can open up the home-buying process to more renters.
You might be able to get an FHA home loan with a debt-to-income ratio (DTI) up to 45% or a credit score as low as 580 while paying only 3.5% down
Select FHA lenders even allow credit scores as low as 500, provided the buyer can make a 10% down payment
Thanks to these perks and others, the FHA loan is one of the most popular low-down-payment mortgages on the market.
Check your FHA loan eligibility. Start here
VA loans
Veterans Affairs-backed VA loans provide military homebuyers with a number of advantages.
No down payment requirement. You can finance 100% of the purchase price. You can also refinance 100% of your home’s value using a VA loan
No mortgage insurance. But you will pay a one-time VA Funding Fee. You can wrap it into the loan amount.
No minimum credit score. Although lenders are allowed to add their own minimums. Those that do often require a FICO score of at least 580 to 620.
Sellers can pay up to 4% of the purchase price in closing costs. So if you find a motivated seller, you could potentially get into a home with nothing out of pocket
If you’re a veteran, active-duty service member, or surviving spouse, the VA mortgage program should be your first stop.
Check your VA loan eligibility. Start here
USDA loans
If you’re not buying in a large city, you may qualify for a USDA home loan. Officially called the Single-Family Housing Guaranteed Loan Program, the USDA loan was created to help moderate- and low-income borrowers buy homes in rural areas.
With a USDA loan, you can buy a home with no money down. The only catch is that you must buy in a USDA-approved rural area (though these are more widespread than you might think). You can find out if the property you’re buying is located in a USDA-eligible rural area and whether you meet local income limits using the USDA’s eligibility maps.
Your monthly payments might be cheaper, too. That’s because interest and mortgage insurance rates are typically lower for USDA loans than for FHA or conforming loans.
There are two types of USDA loans.
The Guaranteed Program is for buyers with incomes up to 115% of their Area Median Income (AMI)
The Direct Program is for those with incomes between 50% and 80% of the AMI
Standard USDA-guaranteed loans are available from many mainstream lenders. But the Direct program requires borrowers to work directly with the U.S. Department of Agriculture.
You typically need a credit score of 640 or higher to qualify.
Check your USDA loan eligibility. Start here
Low income home loan programs
Aside from mortgages that are designed to help people with low incomes buy a home, there are also a number of other programs that offer help to make homeownership more accessible.
Verify your home buying eligibility. Start here
Program
Description
Who Is Eligible
Hud Homes
Discounted homes sold by the Department of Housing and Urban Development.
Low- to moderate-income families, with preference for those who will make it their primary residence. May include single-family homes.
Housing Choice Voucher Program
Vouchers to subsidize the cost of housing in the private market.
Low-income families; must meet income and other criteria set by state and local housing programs.
Good Neighbor Next Door
Significant discounts on homes for teachers, firefighters, police officers, and EMTs.
Must commit to living in the property as a primary residence for at least 36 months. Includes single-family homes.
HFA Loans
Loans offered by state Housing Finance Agencies with reduced interest rates and down payment assistance.
First-time or repeat buyers with low to moderate incomes must meet income requirements. Often, it must be a primary residence.
Down Payment Assistance
Grants or loans to cover the down payment and sometimes closing costs.
Typically for low- to moderate-income families, though criteria can vary by program. Often for single-family homes.
State or Local Assistance
Various grants, loans, or tax credits are offered at the state or local level.
Eligibility varies but usually targets low- to moderate-income families. May include single-family homes.
Mortgage Credit Certificates
Tax credit to reduce federal income tax liability.
First-time homebuyers who meet income requirements; must be primary residence.
Manufactured and Mobile Homes
Loans or grants specifically for manufactured or mobile homes.
Low- to moderate-income families; must meet criteria set by specific housing programs. Usually must be primary residence.
Hud Homes
When the FHA forecloses on homes, those properties are often put up for sale as HUD Homes. And, you can generally purchase one at a steep discount. To qualify for a HUD Home, it will need to be your primary residence for at least 12 months. Additionally, you must not have purchased another HUD in the past 24 months.
Keep in mind that HUD Homes are sold as-is. Many are fixer-uppers. Moreover, HUD Homes are purchased through a bidding process. You’ll need a real estate agent or mortgage broker licensed with HUD to bid on an FHA property.
You can find HUD Homes on the official HUD website, hudhomestore.com. There, you’ll see all HUD real estate owned (REO) single-family properties in your area.
Good Neighbor Next Door
The Good Neighbor Next Door program offers unique benefits for nurses, first responders, and teachers. If you’re eligible, you can buy HUD foreclosure homes at a 50% discount. Use an FHA mortgage, and you only need $100 for a down payment.
You can find the homes on the U.S. Department of Housing and Urban Development website. You’ll also need a HUD-licensed real estate agent to put your offer in for you.
If your offer is accepted and you qualify for financing, you get the home. The 50% discount makes homeownership a lot more affordable. However, be aware that this discount is actually a second mortgage. But it has no interest and requires no payments. Live in the home for three years, and the second mortgage is forgiven entirely.
HFA home loans
Not to be confused with FHA loans, HFA loans are offered in partnership with state and local Housing Finance Authorities.
Many HFA loans are conventional mortgages backed by Fannie Mae and Freddie Mac. They may require as little as 3% down, and many HFA programs can be used with down payment assistance to reduce the upfront cost of home buying.
Borrowers who qualify for an HFA loan might also be in line for discounted mortgage rates and mortgage insurance premiums. To qualify, you’ll typically need a credit score of at least 620. But eligibility requirements vary by program.
Find and contact your state’s public housing finance agency or authority to learn more and see if you qualify. Also, be aware that this type of loan program will require additional approval steps that may make loan closing take longer.
Down payment assistance programs (DPAs)
Down payment assistance is exactly what it sounds like. It provides help with down payments on home purchases and often closing costs. Government agencies, nonprofits, and other sources commonly offer down payment and closing cost assistance. They are usually in the form of a grant or loan (though the loans may be forgiven if you stay in the house for five to ten years).
Most DPA programs target low-income home buyers and have guidelines that make qualifying easier. Some, however, provide assistance to people who buy in “underserved” or “redevelopment” areas, regardless of income. Many DPA programs offer assistance worth tens of thousands of dollars.
Talk to a lender about your options. Start here
Mortgage Credit Certificates (MCCs)
Mortgage credit certificates (MCCs) can stretch your home-buying power. If you meet income requirements, you could get a tax credit equal to some percentage of your mortgage interest. Lenders are allowed to add this credit to your qualifying income when underwriting your mortgage. This allows you to qualify for a higher mortgage amount than you otherwise could.
There are numerous states, counties, and cities that issue mortgage credit certificates, and their regulations and amounts vary greatly. Check with your local housing finance authority to find out whether MCCs are available where you live.
Housing Choice Voucher Program
The Housing Choice Voucher homeownership program (HCV) provides both rental and home buying assistance to eligible low-income households. Also known as Section 8, this program allows low-income home buyers to use housing vouchers to purchase their own homes.
Because local public housing agencies run these voucher programs, eligibility varies depending on location. Still, you’ll likely need to meet the following requirements:
Program-specific income and employment conditions
Being a first-time home buyer
Completing a pre-assistance homeownership and counseling program
Keep in mind that not all states offer voucher programs, and some programs have waiting lists. Also, these programs could limit how much you can sell the home for later on. To find out if your area offers a participating program, use the HUD locator web tool.
Manufactured and mobile homes
A manufactured home usually costs less than a traditional, site-built home. When placed on approved foundations and taxed as real estate, manufactured homes can be financed with mainstream mortgage programs.
Many programs require slightly higher down payments or more restrictive terms for manufactured homes. HomeReady, for example, increases the minimum down payment from 3% to 5% if you finance a manufactured home. Other programs require the home to be brand new.
Additionally, there are often requirements regarding the year the home was built and the property’s foundation. These guidelines will vary between lenders. Mobile homes that are not classified as real estate can be purchased with personal loans like the FHA’s Title 2 program. These are not mortgages because the homes are not considered real estate.
Check your mortgage options. Start here
Tips for buying a house with low income
Whether you’re buying a new home or your first home, these tips can help you achieve your homeownership goals.
Verify your home buying eligibility. Start here
Improve your credit history
Improving your FICO score is the best way to increase your chances of loan approval and qualify for lower mortgage rates.
The credit score needed to purchase a home varies depending on the type of loan you apply for. Conventional loans typically require a score of at least 620, while FHA loans often require at least 580.
Start by pulling free credit reports from annualcreditreport.com to determine your current score. Next, consider a few of the common methods for increasing credit scores. The amount of work that you’ll need to do will depend on your personal financial situation.
As an example, if your credit score is low because you’re using too much of your available credit, you may benefit from a debt consolidation loan to tame your high-interest account balances and improve your credit utilization.
On the other hand, if your credit history reveals missed payments, you’ll need to show at least 12 months of regular, on-time payments to improve your score.
Save for a down payment
The average first-time home buyer puts just 13% down on a new home. Yet, many loan programs require as little as 3% down or no down payment at all.
Remember that you still have to pay closing costs, which are typically around 2% to 5% of your mortgage loan amount. If you put less than 20% down, you’ll almost certainly have to pay for mortgage insurance.
In addition, you may need cash reserves in your savings account. This assures lenders that you can make your monthly mortgage payments should you suffer a financial setback. However, don’t let the down payment scare you away from homeownership. Many buyers qualify without even knowing it.
Pay down debts
Paying down debts will lower your debt-to-income ratio and improve your odds of mortgage approval. This is especially true for those with high-interest credit card debt.
You’ll likely qualify for lower rates when you have:
A low debt-to-income ratio (DTI)
High credit score
3% to 5% down payment
Stable income for the past two consecutive years
Use a first-time home buyer program
First-time buyer programs offer flexible guidelines for qualified buyers. Plus, these special programs exist in every state to help low-income households achieve homeownership.
Unlike traditional conventional loans, the government backs many first-time buyer mortgages. This allows mortgage lenders to offer loans with better rates and lower credit score requirements than they normally would be able to.
Verify your low income home loan eligibility. Start here
Model your budget
Owning a home requires more than qualifying for a loan and making monthly mortgage payments. Homeowners are responsible for a variety of ongoing costs, including:
Homeowners insurance
Property taxes
Mortgage insurance (in many cases)
Utility bills
Ongoing home maintenance
Home improvements
Appliance repair and replacement
Home buyers who have experience paying these ongoing costs of homeownership will be better prepared for the big day when they get the keys to their dream home.
Plus, sticking to this model budget in the months and years before purchasing a home and then saving the money you would spend on housing costs, such as insurance premiums and utilities, is a great way to build cash reserves and save for a down payment.
Use a co-signer
If you’re on the edge of qualifying for your own loan, using a co-signer may be an option.
Essentially, when you buy a house with a co-signer, you and your co-signer are both responsible for making the monthly payments. You’ll both also build and share in the home’s equity. Purchasing a home with a co-signer is quite common among unmarried couples, friends, and family members.
FAQ: Low income home loans
Verify your home buying eligibility. Start here
How do you buy a house with low income?
To buy a house with a low income, you have to know which mortgage program will accept your application. A few popular options include: FHA loans (allowing low income and as little as 3.5 percent down with a 580 credit score); USDA loans (for low-income buyers in rural and suburban areas); VA loans (a zero-down option for veterans and service members); and HomeReady or Home Possible (conforming loans for low-income buyers with just 3 percent down).
I make $25K a year; can I buy a house?
Mortgage experts recommend spending no more than 28 percent of your gross monthly income on a housing payment. So if you make $25K per year, you can likely afford around $580 per month for a house payment. Assuming a fixed interest rate of 6 percent and a 3 percent down payment, that might buy you a house worth about $100,000. But that’s only a rough estimate. Talk with a mortgage lender to get the exact numbers for your situation.
How do I qualify for a low-income mortgage?
Whether or not you qualify for a low income home loan depends on the program. For example, you might qualify for an FHA mortgage with just 3.5 percent down and a 580 credit score. Or, if your house is in a qualified area and you’re below local income caps, you might be able to get a zero-down USDA mortgage. Veterans can qualify for a low-income mortgage using a VA loan. Or, you can apply for the mortgage with a co-borrower and qualify based on combined incomes.
What programs are available for first-time home buyers?
Low income home loans can help first-time home buyers overcome hurdles like low credit or income, smaller down payments, or high levels of debt. A few good programs for first-time home buyers include Freddie Mac’s Home Possible mortgage, Fannie Mae’s HomeReady mortgage, the Conventional 97 mortgage, and government-backed loans like FHA, USDA, and VA. First-time home buyers can also apply for down payment assistance grants through their state or local housing department.
Can the government help me buy a house?
There are a number of ways the government can help you buy a house. Perhaps the most direct way to get help is by applying for down payment assistance. This is a grant or low-interest loan to help you make a down payment. You can also buy a house using a government-backed mortgage, like the FHA or USDA. With these programs, the government essentially insures the loan, so you can buy with a lower income, credit score, or down payment than you could otherwise.
How do I buy a house without proof of income?
You can no longer buy a house without proof of income. You have to prove you can pay the loan back somehow. But there are modern alternatives to stated-income loans. For instance, you can show “proof of income” through bank statements, assets, or retirement accounts instead of W2 tax forms (the traditional method). Many people who want to buy a house without proof of income these days find a bank statement loan to be a good option.
How do you rent to own?
A lease option or rent-to-own home isn’t exactly what it sounds like. You don’t simply rent until the house is paid off. Instead, you usually pay a higher rent for a set period of time. That excess rent then goes toward a down payment when you buy the house at a later date. Rent-to-own might help you buy a house if you don’t have a lot of cash on hand right now or if you need to improve your credit score before applying for a mortgage. However, rent-to-own requires seller cooperation and comes with unique risks.
Can I rent-to-own with no down payment?
Rent-to-own does not mean you can buy a house with no down payment. When you rent-to-own, you’re paying extra rent each month that will go toward your down payment later on. And usually, rent-to-own contracts include an option fee that’s a lot like a down payment. The option fee is smaller. Think 1 percent of the purchase price instead of 3 to 20 percent. And that fee eventually goes toward your purchase. But it’s still a few thousand dollars you must pay upfront to secure the right to buy the home later on.
Can I get a grant to buy a house?
Qualified buyers can get a grant to buy a house. These are called down payment assistance grants. They won’t pay for the whole house, but they can help cover your down payment to make a mortgage more affordable. You’re most likely to qualify for a grant to buy a house if you have a low to moderate income and live in a target area.
What type of low income home loan is the easiest to qualify for?
FHA loans are generally the easiest low income home loan to qualify for. The federal government insures these loans, which means lenders can relax their qualifying rules. It’s possible for a home buyer with a credit score of 500 to get approved for an FHA loan, but most FHA lenders look for scores of 580 or better. And a FICO score of 580 lets you make the FHA’s minimum down payment of 3.5 percent.
How can I get a home loan with low monthly payments?
To get the lowest possible monthly payment, choose a 30-year loan term, find a cheaper home, put more money down, and make sure you have excellent credit before applying for your mortgage. If you can afford a 20 percent down payment, you can avoid PMI premiums, which lower your monthly payments even more. Veterans can get VA loans that require no PMI, regardless of their down payment size.
What’s the lowest amount you can put on a house?
Some home buyers can put no money down with a VA or USDA loan. Conventional loans will require at least 3 percent down, and FHA loans will require at least 3.5 percent down. Down payment assistance grants and loans could help you cover some or all of this down payment.
How much house can I afford if I make $30K a year?
If you make $30,000 a year, you could probably spend about $110,000 on a house, assuming you get a 30-year fixed-rate mortgage at 6 percent. This is a rough estimate. Your unique financial situation may be different. Getting a pre-approval from a lender is the only way to find your actual price range.
What are today’s mortgage rates for low income home loans?
Many low-income mortgage programs have lower interest rates than “standard” mortgage loans. So you might get a great deal.
However, interest rates vary depending on the borrower, the loan program, and the lender.
To find out where you stand, you’ll need to compare loan offers from several lenders and then choose your best deal.
Time to make a move? Let us find the right mortgage for you
If you’re on the cusp of buying a home, one of the first and most significant considerations you’ll encounter is the down payment. This initial investment can influence not just your ability to purchase a home, but also the terms of your mortgage and your financial flexibility in the years to come. Understanding the ins and outs of down payments is more than a financial formality; it’s a critical step in making one of life’s biggest decisions.
In this guide, we explore the essential aspects of making a down payment on a house. From traditional norms to modern options, you’ll learn about the factors influencing down payment requirements and their implications. This article is designed to assist both first-time buyers and experienced investors in understanding the impact of various down payment sizes on the home buying process and their financial future.
The journey to homeownership is filled with important decisions. Our aim is to provide you with the insights needed to make informed choices, aligning your dream of owning a home with your financial objectives. Let’s delve into the importance of down payments and how they play a pivotal role in your home buying adventure.
What is a down payment on a house?
A mortgage is a loan used to purchase a house. But there are very few mortgages available that will cover the total cost of the home.
Instead, most mortgage lenders require that you pay a percentage of the home’s purchase price and finance the rest with a loan. The amount you pay upfront is called a down payment.
This provides the lender with the assurance that you are vested in the property. Otherwise, you may be more likely to default on the mortgage because you didn’t spend any of your own money on the house. Most people won’t miss their monthly mortgage payment and end up in foreclosure. However, lenders typically require it across the board.
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20% Down Payment
Traditionally, banks required individuals to have a 20% down payment on a house to qualify for a loan. But it wound up making homeownership extremely exclusionary.
After all, that amounts to $40,000 on a $200,000, and most people don’t have that kind of money lying around. So while 20% remains the standard down payment preferred by most lenders, it’s no longer the norm.
In fact, data shows that the average down payment amount is shrinking due to young first-time home buyers. But there are some benefits to saving up a larger down payment of 20% before buying a home, and they can add up to some pretty significant savings over time.
Even beyond financial reasons, putting in an offer letter with a 20% down payment with a conventional loan can make you a more attractive buyer when you’re competing for a specific house.
Why? Because it will give you a lower loan-to-value ratio (LTV.) Your loan looks less likely to fall through because you have a more substantial cash flow and assets than someone with a low down payment. All other things equal, a seller will probably select your offer in a competitive market.
Avoid Paying Private Mortgage Insurance
Another major perk of a large down payment? You avoid paying private mortgage insurance (PMI). Any mortgage for a home you own with less than 20% equity is subject to additional insurance to protect the bank.
The amount depends on your loan type, but it’s usually an annual amount divided out as part of your monthly payments. To get rid of the mortgage insurance, you typically have to refinance the loan, which can be costly.
You also get a better interest rate with a higher down payment. On top of that, having a smaller loan amount lowers your monthly mortgage payment, giving you more money left in your pocket each month.
Low Down Payment Mortgage Options
Most lenders these days don’t expect you to have a full 20% down payment saved up. How much down payment you’ll need for a house depends on the type of loan you choose. The exact amount you’ll need varies based on several factors.
Here’s a rundown of the most common types of mortgages and the down payment requirements for each one. Start here to begin your selection process. It’s also wise to ask potential lenders to provide different scenarios for each loan type you qualify for.
Conventional Loans
Even if you don’t have a 20% down payment, you can qualify for a conventional loan. The minimum down payment is 3%, although you can also do any amount higher than that.
On a $200,000 home, you would pay $6,000 with the minimum down payment. Until a few years ago, at least a 5% down payment was required.
However, Fannie Mae studies indicated that saving up that much money was creating an obstacle to homeownership for many creditworthy individuals. So they created a 97% loan-to-value option that lenders can offer to mortgage applicants.
2% may not seem like a huge difference, but it adds up quickly when dealing with such large dollar amounts. In the scenario above, a 5% down payment on the same house would require a $10,000 down payment — $4,000 more than the 3% option.
Conventional Mortgage Lender Requirements
To qualify for a conventional mortgage, you’ll need to meet certain lender requirements, which can be strict compared to other loan types. For example, credit score requirements generally start around 620, although some lenders may accept as low as 580.
You’ll receive a higher interest rate with both a lower credit score and a small down payment, another factor in determining how much to save for your home. Of course, as with any down payment under 20%, you will have to pay mortgage insurance.
The exact rate can vary, but here’s an example of how much it could cost you. If your loan amount is $194,000 (after your 3% down payment) and your annual mortgage insurance rate is 0.5%, you’d have to pay $970 each year. Split up over 12 monthly mortgage payments, your PMI would add just over $80 to your bill.
FHA Loans
An FHA loan is another option for a loan with a low down payment. FHA loans are backed by the Federal Housing Administration, and insured by the federal government. They allow you to qualify for a mortgage without as many restrictions as conventional loans.
With an FHA loan, you only need a 3.5% down payment. So on that same $200,000 house, you’d only need to supply $7,000 in upfront cash.
FHA Loan Lender Requirements
You also get to take advantage of lower credit score requirements, with the minimum at only 580. Plus, you can qualify with a higher debt-to-income ratio. Conventional lenders only allow 43% of your monthly income to go towards debt payments, including your mortgage.
On the other hand, an FHA lender might let that number creep up between 45% and 50%. So, this is another example of a couple of percentage points making a difference in how much home you can afford.
Mortgage Rates and Private Mortgage Insurance
Again, lower mortgage application standards, including a smaller down payment, typically result in higher costs elsewhere. As a result, you’re likely to see higher interest rates and a higher PMI. With an FHA loan, you’ll have to pay that PMI in two different ways.
The first is a one-time payment at closing. This amounts to 1.75% of your loan amount. Again, say that you’re taking out a $190,000 loan; part of your closing costs would include a $3,325 PMI payment. On top of that, you’ll pay about 0.85% annually.
In this example, that amounts to $1,615, adding $134 to your monthly mortgage payment. So making a low down payment can cost you when it comes to paying PMI each month! Still, it may be a better option, especially if you can quickly reach a 20% loan-to-value and refinance the home loan in a few years.
VA Loans
If you’re a military veteran or active military member, you can qualify for a loan backed by the VA. The great thing about this type of loan is that it doesn’t require any down payment at all.
It also has lower credit score requirements, and no mortgage insurance is required. You do, however, have to pay a one-time funding fee. It can either be paid at closing or rolled into your mortgage amount.
The fee amount varies depending on a few different factors, including your down payment amount, your type of service, and whether you’ve used a VA loan in the past. But if you are regular military personnel and a first-time user of the VA loan with a zero dollar down payment, your funding fee will total 2.15% of the loan amount.
For the sake of comparison, let’s look at the $190,000 loan again. In this scenario, your funding fee comes to $4,085. Since it’s just a one-time fee, the impact on your monthly payment would be fairly minimal since it’s spread out over 30 years.
USDA Loans
A USDA loan is backed by the U.S. Department of Agriculture and promotes homeownership in rural areas. But you don’t have to buy a farm to qualify for this loan type. In fact, many peripheral suburban areas are included.
The great thing is that there is no down payment required for a USDA loan. However, you must meet certain income requirements and may only earn a certain amount each year, which varies depending on where you live.
Like VA loans, USDA loans don’t require PMI, but you have to pay an upfront premium if your down payment is less than 20%. The premium amount is 2% of your loan amount. That would be $3,800 on a $190,000 loan.
Again, you can either pay it up front as part of your closing costs or roll it into your mortgage amount. Check out the eligibility map to see if any properties near you qualify for a USDA loan.
HomeReady Loans
Our final low down payment loan is the HomeReady loan. This loan helps potential homeowners in low-income areas to get the financing they need for a mortgage.
The required down payment on a house is just 3%, and your debt-to-income ratio can be as high as 50%. There’s no income limit, but the property does have to be located in a low-income census tract.
You also have to complete an online education program about homeownership. You will need to pay mortgage insurance with the minimum down payment. However, the program claims to offer lower premiums compared to other loans.
If you find a home you love in an approved area, it’s definitely worth comparing to other available options.
See also: How to Buy a House With No Down Payment
What other costs are associated with buying a home?
We’ve talked a lot about private mortgage insurance adding to the total cost of your loan. But it’s also important to remember that there are fees and expenses to consider.
Some you’ll have to pay upfront, while others are paid over the course of the loan. But, first, remember that your monthly payment includes not only principal and interest but also taxes and insurance.
PITI
Cumulatively, this is called PITI (principal, interest, taxes, and insurance), and those add-ons are often overlooked when using a mortgage calculator. City or county taxes are owed every year, but most lenders charge you monthly and then make the payment on your behalf.
Homeowners Insurance
Homeowners insurance is also required for a loan and can easily tack on an extra $300 to $1,000 per year, depending on the value of your home.
Closing Costs
You should also consider closing costs. Many buyers may try to negotiate that the seller covers these costs, but this tactic isn’t always successful, particularly in competitive real estate markets.
Closing costs cover various services and fees and usually amount to 3-5% of the home’s purchase price. So on that $200,000 home, you could end up paying between $6,000 and $10,000 in closing costs.
If you don’t have the cash up front, you can typically roll them into the loan, but you’ll end up with higher monthly payments. Don’t be afraid of closing costs or any other fees associated with a mortgage, especially if you don’t have much saved for a down payment.
Bottom Line
Understanding down payments is crucial in your home-buying journey. The ideal down payment for your new home hinges on your financial circumstances and the types of loans you’re considering. While a larger down payment can reduce long-term costs through lower interest rates and mortgage insurance, balancing this with your available savings and overall budget is key.
Remember to account for additional expenses like closing fees, taxes, and insurance. These play a significant role in the overall cost of purchasing a home. Utilizing tools like mortgage calculators can help you grasp the implications of different down payment amounts.
In the end, whether you choose a minimal down payment or aim for 20%, the most vital aspect is making an informed decision that suits your financial situation and long-term housing plans. Stay informed, seek guidance when needed, and confidently take this important step towards homeownership.
Frequently Asked Questions
What is the ideal credit score to qualify for a mortgage with a low down payment?
While the minimum credit score required for a mortgage can vary depending on the lender and the type of loan, generally, a score of 580 or higher is needed to qualify for more favorable low down payment options like FHA loans. Higher scores can secure better interest rates and terms.
How can I improve my credit score before applying for a mortgage?
Improving your credit score involves several steps: pay your bills on time, reduce your debt-to-income ratio, avoid opening new credit accounts before applying for a mortgage, and check your credit report for errors. Consistently managing these areas can gradually improve your score.
Are there any down payment assistance programs available?
Yes, there are various down payment assistance programs available, often based on location, income level, or first-time homebuyer status. These programs can offer grants, low-interest loans, and other forms of assistance. It’s advisable to research local and state programs for eligibility.
Can gift funds be used for a down payment?
Yes, many loan types allow the use of gift funds for down payments. However, there are specific rules regarding the source of these funds and documentation required. It’s important to discuss this with your lender to ensure compliance with their guidelines.
What is the difference between pre-qualification and pre-approval for a mortgage?
Pre-qualification is an initial step where a lender gives you an estimate of how much you might be able to borrow based on basic financial information you provide. Pre-approval is more comprehensive, involving a detailed review of your finances and a more concrete offer of loan amount and terms.
How long does the mortgage application process typically take?
The duration of the mortgage application process varies, but generally takes between 30 to 45 days from application to closing. This timeline can be influenced by the complexity of your financial situation, the type of loan, and the efficiency of your lender.
What happens if I make a down payment of less than 20%?
If you make a down payment of less than 20%, you’ll likely need to pay for Private Mortgage Insurance (PMI), which protects the lender in case of default. PMI is typically required until you have at least 20% equity in your home.
Can I withdraw from my retirement account for a down payment without penalty?
In some cases, you can withdraw funds from certain retirement accounts, like an IRA, for a down payment without incurring early withdrawal penalties, especially if you’re a first-time homebuyer. However, there are limits and tax implications to consider.
What are the risks of putting down a smaller down payment?
A smaller down payment on a house can mean larger monthly mortgage payments, higher interest rates, and the necessity to pay PMI. It may also affect your competitiveness as a buyer in a strong market.
How can I estimate my monthly mortgage payment?
Your monthly mortgage payment can be estimated using online mortgage calculators. These calculators take into account the loan amount, down payment, interest rate, and loan term, giving you a rough idea of what to expect.
Mortgage rates ticked up this week as the 10-year Treasury yield made its way back above 4%.
The 30-year fixed-rate mortgage averaged 6.66% as of Jan. 11, a slight increase from last week’s 6.62%, according to Freddie Mac‘s Primary Mortgage Market Survey released on Thursday. The 15-year fixed-rate mortgage averaged 5.87% this week, down from 5.89% the prior week. HousingWire’s Mortgage Rates Center showed Optimal Blue’s average 30-year fixed rate on conventional loans at 6.66% on Thursday, down from 6.68% recorded at the same time last week.
“Mortgage rates have not moved materially over the last three weeks and remain in the mid-six percent range, which has marginally increased homebuyer demand,” Sam Khater, Freddie Mac’s chief economist, said in a statement. “Even this slight uptick in demand, combined with inventory that remains tight, continues to cause prices to rise faster than incomes, meaning affordability remains a major headwind for buyers. Potential homebuyers should look closely at existing state and local resources, such as down payment assistance programs, which can considerably help defray closing costs.”
Mortgage rates dipped below 7% before the start of the new year, steadily declining each week of December. Most housing professionals expect mortgage rates to continue trending downwards in 2024. Economists hope that declining rates will spur more sellers to list their homes. However, mortgage rates might not fall as fast as expected, hampering growth in listing activities. With about two-thirds of outstanding mortgages still carrying rates below 4%, home sellers may choose to delay their selling plans, waiting for a better opportunity.
Forecasters expected the Federal Reserve to begin cutting rates in March. However, given December’s strong jobs report and today’s inflation reading, it’s becoming more likely that those rate cuts will come later in the year, Lisa Sturtevant, chief economist at Bright MLS, said in a statement.
Stephanie Horan is a lead data analyst for the MarketWatch Guides Team, specializing in home buying and personal finance. Beginning her career in asset management and transitioning to data journalism, Stephanie is a Certified Educator of Personal Finance (CEPF®). She is passionate about translating data to provide digestible insights for a broad audience. Her studies have been featured in CNBC, Bloomberg and the New York Times, among many others.
Edited By:
Andrew Dunn
Andrew Dunn is a veteran journalist with more than a decade of experience in the business and finance arena. Before joining our team, Andrew was a reporter and editor at North Carolina news organizations including The Charlotte Observer and the StarNews in Wilmington. In those roles, his work was cited numerous times by the North Carolina Press Association and the Society of Business Editors and Writers. Andrew completed the business journalism certificate program from the University of North Carolina at Chapel Hill.
Editor’s Note: Parts of this story were auto-populated using data from Curinos, a mortgage research firm that collects data from more than 250 lenders. For more details on how we compile daily mortgage data, check out our methodology here.
Mortgage rates rose slightly in the first week of 2024, with the 30-year fixed-rate mortgage increasing by 0.10 percentage points, according to data from Curinos analyzed by MarketWatch Guides.
This slight increase took place in the midst of mixed economic signals. The Labor Department reported that employers added 216,000 jobs in December, exceeding economists’ expectations, while the stock market had a rocky start to the beginning of the year. Through last Friday, the S&P is down roughly 1% year-to-date.
Economists with the Mortgage Bankers Association are still confident that rates will fall over the coming months. The next Federal Reserve meeting is scheduled for the end of January, and though rates may be held steady at that meeting, the board previously indicated that they expect three rate cuts throughout the year.
Here are today’s average mortgage rates:
30-year fixed mortgage rate: 7.12%
15-year fixed mortgage rate: 6.41%
5/6 ARM mortgage rate: 6.87%
Jumbo mortgage rate: 7.01%
Current Mortgage Rates
Product
Rate
Last Week
Change
30-Year Fixed Rate
7.12%
7.18%
-0.06
15-Year Fixed Rate
6.41%
6.40%
+0.01
5/6 ARM
6.87%
7.00%
-0.13
7/6 ARM
7.04%
7.15%
-0.11
10/6 ARM
7.15%
7.25%
-0.10
30-Year Fixed Rate Jumbo
7.01%
7.07%
-0.06
30-Year Fixed Rate FHA
6.78%
6.87%
-0.09
30-Year Fixed Rate VA
6.78%
6.86%
-0.08
Disclaimer: The rates above are based on data from Curinos, LLC. All rate data is accurate as of Friday, January 12, 2024. Actual rates may vary.
>> View historical mortgage rate trends
Mortgage Rates for Home Purchase
30-year fixed-rate mortgages are down, -0.06
The average 30-year fixed-mortgage rate is 7.12%. Since the same time last week, the rate is down, changing -0.06 percentage points.
At the current average rate, you’ll pay $673.38 per month in principal and interest for every $100,000 you borrow. You’re paying less compared to last week when the average rate was 7.18%.
15-year fixed-rate mortgages are up, +0.01
The average rate you’ll pay for a 15-year fixed-mortgage is 6.41%, an increase of+0.01 percentage points compared to last week.
Monthly payments on a 15-year fixed-mortgage at a rate of 6.41% will cost approximately $866.17 per $100,000 borrowed. With the rate of 6.40% last week, you would’ve paid $865.62 per month.
5/6 adjustable-rate mortgages are down,-0.13
The average rate on a 5/6 adjustable rate mortgage is 6.87%, a decrease of-0.13 percentage points over the last seven days.
Adjustable-rate mortgages, commonly referred to as ARMs, are mortgages with a fixed interest rate for a set period of time followed by a rate that adjusts on a regular basis. With a 5/6 ARM, the rate is fixed for the first 5 years and then adjusts every six months over the next 25 years.
Monthly payments on a 5/6 ARM at a rate of 6.87% will cost approximately $656.59 per $100,000 borrowed over the first 5 years of the loan.
Jumbo loan interest rates are down, -0.06
The average jumbo mortgage rate today is 7.01%, a decrease of-0.06 percentage points over the past week.
Jumbo loans are mortgages that exceed loan limits set by the Federal Housing Finance Agency (FHFA) and funding criteria of Freddie Mac and Fannie Mae. This generally means that the amount of money borrowed is higher than $726,200.
Product
Monthly P&I per $100,000
Last Week
Change
30-Year Fixed Rate
$673.38
$677.43
-$4.05
15-Year Fixed Rate
$866.17
$865.62
+$0.55
5/6 ARM
$656.59
$665.30
-$8.71
7/6 ARM
$667.99
$675.41
-$7.42
10/6 ARM
$675.41
$682.18
-$6.77
30-Year Fixed Rate Jumbo
$665.97
$670.01
-$4.04
30-Year Fixed Rate FHA
$650.59
$656.59
-$6.00
30-Year Fixed Rate VA
$650.59
$655.93
-$5.34
Note: Monthly payments on adjustable-rate mortgages are shown for the first five, seven and 10 years of the loan, respectively.
Factors That Affect Your Mortgage Rate
Mortgage rates change frequently based on the economic environment. Inflation, the federal funds rate, housing market conditions and other factors all play into how rates move from week-to-week and month-to-month.
But outside of macroeconomic trends, several other factors specific to the borrower will affect the mortgage interest rate. They include:
Financial situation: Mortgage lenders use past financial decisions of borrowers as a way to evaluate the risk of loaning money.
Loan amount and structure: The amount of money that bank or mortgage lender loans and its structure (including both the term and whether its a fixed-rate or adjustable-rate).
Location: Mortgage rates vary by where you are buying a home. Areas with more lenders, and thus more competition, may have lower rates. Foreclosure laws can also impact a lender’s risk, affecting rates.
Whether borrowers are first-time homebuyers: Oftentimes first-time homebuyer programs will offer new homeowners lower rates.
Lenders: Banks, credit unions and online lenders all may offer slightly different rates depending on their internal determination.
How To Shop for the Best Mortgage Rate
Comparison shopping for a mortgage can be overwhelming, but it’s shown to be worth the effort. Homeowners may be able to save between $600 and $1,200 annually by shopping around for the best rate, researchers found in a recent study by Freddie Mac. That’s why we put together steps on how to shop for the best mortgage rate.
1. Check credit scores and credit reports
A borrower’s credit situation will likely determine the type of mortgage they can pursue, as well as their rate. Conventional loans are typically only offered to borrowers with a credit score of 620 or higher, while FHA loans may be the best option for borrowers with a FICO score between 500 and 619. Additionally, individuals with higher credit scores are more likely to be offered a lower mortgage interest rate.
Mortgage lenders often review scores from the three major credit bureaus: Equifax, Experian and TransUnion. By viewing your scores ahead of lenders considering you for a loan, you can check for errors and even work to improve your score by paying down balances and limiting new credit cards and loans.
2. Know the options
There are four standard mortgage programs: conventional, FHA, VA and USDA. To get the best mortgage rate and increase your odds of approval, it’s important for potential borrowers to do their research and apply for the mortgage program that best fits their financial situation.
The table below describes each program, highlighting minimum credit score and down payment requirements.
Though conventional mortgages are most common, borrowers will also need to consider their repayment plan and term. Rates can be either fixed or adjustable and terms can range from 10 to 30 years, though most homeowners opt for a 15- or 30-year mortgage.
3. Compare quotes across multiple lenders
Shopping around for a mortgage goes beyond comparing rates online. We recommend reaching out to lenders directly to see the “real” rate as figures listed online may not be representative of a borrower’s particular situation. While most experts recommend getting quotes from three to five lenders, there is no limit on the number of mortgage companies you can apply with. In many cases, lenders will allow borrowers to prequalify for a mortgage and receive a tentative loan offer with no impact to their credit score.
After gathering your loan documents – including proof of income, assets and credit – borrowers may also apply for pre-approval. Pre-approval will let them know where they stand with lenders and may also improve negotiating power with home sellers.
4. Review loan estimates
To fully understand which lender is offering the cheapest loan overall, take a look at the loan estimate provided by each lender. A loan estimate will list not only the mortgage rate, but also a borrower’s annual percentage rate (APR), which includes the interest rate and other lender fees such as closing costs and discount points.
By comparing loan estimates across lenders, borrowers can see the full breakdown of their possible costs. One lender may offer lower interest rates, but higher fees and vice versa. Looking at the loan’s APR can give you a good apples-to-apples comparison between lenders that takes into account both rates and fees.
5. Consider negotiating with lenders on rates
Mortgage lenders want to do business. This means that borrowers may use competing offers as leverage to adjust fees and interest rates. Many lenders may not lower their offered rate by much, but even a few basis points may save borrowers more than they might think in the long run. For instance, the difference between 6.8% and 7.0% on a 30-year, fixed-rate $100,000 mortgage is roughly $5,000 over the life of the loan.
Expert Forecasts for Mortgage Rates
With mortgage interest rates climbing steadily throughout the first half of 2023 and exceeding 7%, prospective homeowners may be wondering: Will there be any relief going forward? Some experts are optimistic.
Fannie Mae and the Mortgage Bankers Association (MBA) project that rates will fall going into 2024 and throughout next year. In fact, the MBA predicts that rates will end 2024 at 6.1%.
More Mortgage Resources
Methodology
Every weekday, MarketWatch Guides provides readers with the latest rates on 11 different types of mortgages. Data for these daily averages comes from Curinos, LLC, a leading provider of mortgage research that collects data from more than 250 lenders. For more details on how we compile daily mortgage data, check out our comprehensive methodology here.
Editor’s Note: Before making significant financial decisions, consider reviewing your options with someone you trust, such as a financial adviser, credit counselor or financial professional, since every person’s situation and needs are different.