The past week I have been working with a newly-married couple that is looking to purchase their first home together. She purchased a condo about three years ago; it has already appreciated. He has been saving money with an eye toward buying a home so they both have resources to bring to a down payment.
They want to avoid paying Private Mortgage Insurance (PMI) though which usually means you have to put down at least 20 percent of the purchase price. PMI can cost buyers from .3 percent to 1.5 percent of the total of the loan. It is insurance that protects the lender if the buyer defaults and the property goes into foreclosure.
Loans that are insured by the Federal Housing Administration (FHA) don't require PMI, but there is an insurance payment due it just has a different name.
The FHA upfront premium (UFMIP) can be paid as a lump sum at closing, or rolled into the loan. Either way, it’s a one-time payment. The annual FHA MIP, on the other hand, is a recurring expense that has to be paid for the life of the loan in some cases.
It used to be that the annual FHA mortgage insurance premium could be canceled when the borrower reached a loan-to-value (LTV) ratio of 78%. That rule was changed in 2013. For most loans made in 2014 and beyond, FHA borrowers who put down less than 10% will have to pay the annual MIP for the life of the loan. The good news is that can put down as little as 3.5 % with an FHA loan if you qualify. This can be a big advantage to buyers who can qualify for the payments but don't have a lot of money saved for a down payment. The down side is FHA has limits on how much money ($679,650 for "high cost" areas) it will loan and in some of the high cost areas in California an FHA loan isn't enough to buy you a house.
So I was curious about where you could buy with less than 20 percent down. Here is an interesting article on down payments made, on average, in various areas around the country. San Diego they peg 15.9% as the average.
