Best mortgage options when you have less than 20% downpayment?

Question

Whats the best way to buy a home (condo) when you have less than 20% downpayment?

I'll have closer to 10%. Should I just pay PMI or take out a loan for the other 10% or something else?

I live in the USA.

Answer 1

Ultimately this depends on a number of factors, some of which could be very localized.

The first question to ask yourself is why you are purchasing a house. If your reason can be summarized as something like "because it is a good investment", then the simple answer is to wait. Houses come with many fun hidden expenses (like the dishwasher crapping out or needing a new roof in the middle of winter) and historically their returns approximate inflation. In addition, any wealth you do gain is tied up in the house. There are many online resources that can step you through the thought process on deciding if getting a home is right or not, as well as calculators that can account for unexpected expenses and such to indicate the financial side of things.

Now that you have decided buying a house makes sense...

In the US there are a number of options you have. If you (or your spouse) have a military record (either currently active or retired/honorable discharge) then you qualify for the VA loan program which offers low-money-down loans without PMI.

If you want to buy a property that is rural farmland, and you meet a number of other requirements there are USDA loans available that also have low-to-no down payment required and no PMI.

For conventional loans, lenders generally will not accept traditional loans for the down payment, though sometimes family loans are ok with them (family loans are a bad idea for other reasons).

Assuming you do not qualify for any of those other programs, and you do not wish to take a gift/loan/"family feud starter" from your family, you still have a few other possibilities. Many states have programs to help with down payment assistance. Depending on where the house you want is, how much you earn, how expensive the house is, and other possible factors, you might be able to get a grant or an extremely low-to-no interest loan to help bridge the gap. Note that these programs might put limits on the kind of loan you can have (for instance it might specify you need a FHA, VA, or USDA loan to qualify). The specific details of the plan can be very location specific.

For instance Washington State has a state wide program (WSHFC), but Seattle city also has a program. The income limits, maximum purchase price, and assistance amount are very different between the two programs.

A great resource to start with is the Department of Housing and Urban Development (HUD). They have more information on some of the federal level programs, and can also direct you to the local programs near you. Pay attention to the local programs, because many of them have classes for eligibility that you can take for free and that discuss loans and the home buying process for your area (this is a great resource, even if you don't wind up using those programs).