Homeownership Made Easy: Finding the Perfect Down Payment
There is a myth out there that you need 20% down to buy a house. If that was the case, I may not be able to buy a house, or in this case, you may not be able to buy a house. I’m gonna talk about, is that true or actually how much money or what’s the least amount of down payment I can get. Welcome to my channel. If you need a referral for a local agent in your neighborhood, I belong to the Top Agents Network in the USA and I can refer you one and you may need one after you look at this video. So let’s look at the myth about do you need a 20% down payment. As an example, if you buy a $450,000 house today, which is almost an average medium price nationwide. So if you have to put 20% down, you need $90,000 just for the down payment plus closing cost. So let’s see, what is the truth? Before I give you what the minimum down payments are, I wanted to explain to you why the first step in buying a house is to make sure that you have enough down payment to buy a house.
One of the biggest reasons people don’t buy homes and they want to buy a home is number one, is indecision. And that’s the decision to make or the decision to save money. So if you start saving money, $100 a month, $200 a month, $500 a month, in two, three, four years, you will have enough money to buy a house. You will have enough money to put a down payment to buy a house. And buying a house is an American dream.
So let’s start with a VA loan. A VA loan is loan for a special grant from the Veterans Administration. And if you’re a veteran, you need 0% down to buy a house. Yes, very true. You don’t need 20% down. You could put 20% down to buy a VA loan, but you pretty much need 0% down. And in some cases there are VA no no loans where if the seller pays for the closing cost, the VA loan is 0% plus zero closing cost. So you pretty much can buy a house worth 500, 600 or more, depending on the state you’re in and the county you are in, because there’s restrictions on the maximum amount of loans you can buy. But basically, if you’re a veteran, you can buy a house with 0% down and zero cost. So let’s move on.
The next step you can buy and of course it’s not 20% down, I’m here to tell you, and there’s a lot of loans out there. There’s a special loan called the FHA loan, which is by the Federal Housing Administration. In that case, you need approximately 3.5% down. It’s not exactly 3.5%. So we have to use the term approximately 3.5% down. By the way, as a disclosure, I’m not a lender. I don’t do loans. I sell homes and investment properties. So I wanted to disclose that. So if you have specific questions about specific loan programs and specific to you, please call a lender or contact me. My email will be at the end of this video and I can refer you to a lender in your neighborhood. So, talking about the FHA loan, you need approximately 3.5% down plus closing cost. So what are closing costs? Well, anytime you buy a house, whether it’s 3% down or 10% down or 20% down, there’s two or three kinds of costs that you need. Number one is your down payment. Number two are your closing cost. In California we have escrow and title. I know in a lot of states you use an attorney, so you have those costs. And the third cost is what we call the prepaids. I won’t get into details, but the prepaid cost are the cost that lenders require to pay ahead of time. For example, in California you have to pay six months of property tax ahead of time and you have to pay up to one year of insurance. So those are prepaid cost. And the best way to show you is via an example. So let’s look at an example on a $500,000house, what your total cost would be for you to buy a house on an FHA loan? 3.5%. So I’m going to assume certain things to give you this example. Number one, I’m going to take an example of a $500,000 house.
I’m in California, so for 500 you don’t get much. But a lot of people are maybe in other states where 500 is a lot of money to buy a house. So I’m going to take an example of a 500, which is a mid range home. I’m also going to assume that you’re going to get a 3.5% FHA loan and your interest rate is approximately 5.5%. Of course, rates change daily. This is just a scenario to show you an example of your cost. So I’m using 5.5% loan. So what you need is on a $500,000 loan, if you look at this chart, your total downpayment, assuming it’s 3.5%, approximately you need $17,500. So your monthly payment, if you put three and a half percent down FHA loan will be a total of PITI, which is the Principal Interest Tax and Insurance of about $3,633 per month for 30 year fixed rate. Let’s look at the fixed closing cost. If you look at the total, it has $10,000. But I want to caution you, if you go up to the origination fee, the fifth item in the fixed closing cost, it’s 48 25. Those are fees that the lender charges. But these days you can negotiate or a lot of lenders don’t charge you the origination fees. So you can pretty much get rid of the almost $5,000 from your closing cost, which can bring it down to $5,000. Then we look at the prepaids. If you look on the right hand side, we have seven months of property taxes. And of course, this is Orange County where the property tax rate is 1.1%. It could be different in your state and county, we have 15 months of insurance. Of course, that could change. And we have the FHA MIP, which is the Mortgage Insurance Premium. And that’s an approximate as well. So you need total prepaid cost of almost $8,000. So if you look at the total to bring to close your closing cost, your prepaid cost and your down payment, it comes up to about $35,000. But like I said, a lot of the fees can be negotiable, especially the origination fees. Some charge you 1%, some don’t. It depends on your terms, your conditions, your FICO scores and your debt ratio. So it varies. So it could be anywhere from $30,000 to $35,000 when you buy a $500,000 house on an FHA loan program.
Now, one thing I would like to mention to you, this is done quite normally and frequently is that a lot of times on an FHA loan you can ask the seller to pay certain closing cost. Let’s say you only have $25,000 and you need to come up with $35,000. Where do you get the $10,000? Assuming you ask for gift from your parents, gift from your friends, and that 25,000 that you have includes that gift. So what could be done, let’s say on a house that’s worth $500,000, you could ask the seller to pay the closing cost of 10,000. And some of them might pay, some of them may not. The other way to do it is you could raise the price of your purchase home of $500,000 to $510,000 and then ask the seller to pay you $10,000 in closing cost. So the technical price is $500,000 to the sellers. But the only thing is you have to make sure that the house is going to appraise at almost $510,000. I don’t want to get into too much details, but you can see that it’s very easy to come up with three and a half percent down closing costs and prepaid. If you plan six months ahead or three months ahead, or three years ahead, you can start saving for your down payment for an FHA loan. And these are the numbers that you need to come up with. So let’s look at other numbers. When it comes to a conventional loan.
The other option, if you don’t put three and a half percent down or if you don’t have 0% down, if you’re not a VA, is, you can go with a conventional loan and they typically require 5% down. So let’s go back to the example of the $500,000 house. If you buy a $500,000 house and if you put 5% down, you need to come up with $25,000 of down payment plus your closing cost and prepaid. By the way, again, I’m going to show you an example of what is your total cost. And this is assuming it’s a fixed rate and the rate is five and a half percent fixed for 30 years. So let’s look at this chart. As you can see, if you buy a $500,000 house, your total payments will be $3,709 a month for 30 years. Fixed. Your down payment is $25,000. Your fixed closing cost, and of course this is all approximate, is $10,000, which assumes that there’s 47 to 50 that your lender is charging you for origination fee, which could be negotiable, could be lowered or could be taken out, and then you have the prepaid cost. And this is assuming it’s Orange County where the property tax is 1.1% and I’ve included seven months of property taxes prepaid. So the total prepaid cost is almost $8,600. So to buy a house at 5% down on a $500,000 purchase price, you need approximately $43,762. 25. And course, this is just an example.
All these numbers are negotiable, including your escrows and titles and origination fees, your processing fees, your underwriting fees, junk fees, blah, blah, blah. So everything is negotiable. That’s why you need to work with a great agent. And I can refer you to someone. The next way to buy a house with a 20% down, which I’m going to talk to you in a minute. But I just found out two days ago that there is a lending company out there. And because the rates are so high, because the prices have gone so high, because of the high inflation, this company, which is a national mortgage lending company just came up with a program just last week, which I found out a few days ago where you can buy a house with 1% down. That’s correct, 1% down. They will pay 2% as a grant money.
So it’s a special loan, conventional loan, and it’ll be a fixed rate loan. So if you want more information on that I don’t have all the information yet, I’m looking into it. But if you want to find out about it and want to talk to an agent or a lender in your neighborhood that will offer 1%. Direct message me. My email is email@example.com. So let’s move on to the 20% down scenario. Again, taking the $500,000 house with 20% down, you need $100,000. So let’s look at the numbers for this. As this chart shows, $500,000 20% down is $100,000. Your monthly payment will be 2, 896.16. Remember, it’s a lot less than what you had at 5% down, which was over $3,000.So the more down payment you put, the less payments you have. The one other advantage and a lot of people, and that’s why there’s a myth that you need 20% down. A lot of people, at least the people that I work with, a lot of them put 20% down.
One of the main advantages, of course, the more downpayment you put, the less mortgage payment you have. But the main reason a lot of people put 20% down is that if you put 20% down, then the lenders does not require you to put a PMI, which is the Private Mortgage Insurance or the MIP Mortgage Insurance Premium. So in this case, how much is that that you save? If you look at the chart on the 5% down, the MIP or the monthly MIP was $389 a month with a 25% down. There is no 389 a month. So you save right off the bat the PMI of 389 a month. And because you put more down, your mortgage goes low. So there’s almost a $500 difference between putting 5% down and a 20% down. So the higher down payment, the lower your mortgage payment and faster you pay off your mortgage.
The other topic that I did not mention to you when I talk about VA, where they don’t have to put any down payment or 0% down, is a lot of the cities and counties and state offer grant programs where you can buy homes with 3% down or 5% down or 2% down. And those are grant programs. For example, in California, because I’m in California, there’s a program called GSFA (Golden State Finance). You may want to look it up or direct message me and I’ll send you some information where the county or the state or the city are trying to help buyers buy homes. So they give you grants. I know there’s a lot of grants. For example, in the city of Anaheim, they had a grant program few years ago where if you were a policeman or a fireman, et cetera, they gave you assistance with the down payment which were not refundable, which were not needed as long as you stayed in the house. So check out your local authorities, check your local, check with your local Realtors. And there’s a lot of grant programs out there where you don’t have to come up with a lot of down payment or if you have a certain amount of down payment, they will assist you with additional grant programs to increase your down payments. So just to let you know, you don’t have to buy a house with 20% down. You can buy it with 0% down or a slow as three and a half percent down. The key is, decide to buy and start saving. Whether you’re buying in the next six months or the next five years, start saving every month. Make a decision. Get an extra job, do a side hustle, cut your expenses. Starbucks or Golf or whatever, to buy a house. Good luck to you. Feel free to contact me for anything I can help you with.