You can buy a home with a 3.5% downpayment

One of the things that often surprises my buyers is that they only need a 3.5% downpayment. That’s right…you do not need to wait until you have saved a 20% downpayment.

The idea of purchasing a home can be daunting because buyers have no idea what kind of funds are required for downpayments, closing costs, and qualifying income. Let’s take a look at a home that is currently on the market and break those numbers down. I saw this great townhouse in Haymarket, VA, currently listed for $290,000. It has 3 bedrooms and 2 full baths on the upper level as well as a 1 car garage.

Most of the contracts that I negotiate for my buyers include an average seller contribution of 2% of the sales price towards the buyer’s closing costs. Sometimes the negotiated contributions will cover all of the buyer’s closing costs. A 3.5% downpayment for this townhouse would be $10,150. Closing costs would range between $9,000 and $12,200 depending on loan costs and what time of month you settle on the home. It’s possible to purchase this home for as little as $10,150 of your own funds*.

The second part of purchasing this home is qualifying for the mortgage. To qualify for an FHA loan, you have to have a FICO score of at least 500, but to qualify for the 3.5% downpayment loans, you have to have a FICO score of at least 580. FHA has qualifying ratios that are used to determine how much money a buyer needs to make. The “front ratio” is 29%; this means that your total monthly mortgage payment (PITI: Principle, Interest, Taxes, Insurance, HOA/Condo dues) cannot exceed 29% of your gross income. The “back ratio” is 41%; this means that your total monthly recurring balance payments (mortgage, car loans, credit card payments, school debt, etc) cannot exceed 41% of your gross income.

Here is how the numbers would break down*:

Sales Price: $290,000

Downpayment: $10,150

Loan amount: $279,850

Monthly mortgage payment: $2,240

Qualifying yearly income on the front ratio of 29%: $92,668

Additional allowable monthly payments for other revolving debt: $926

Are these numbers more encouraging or less encouraging than you were expecting? I’d love to hear your thoughts!

*All information in this post is approximate and for illustration purposes only. Guidelines and loan programs are continually changing. You will need to speak to a qualified loan officer for the most accurate information regarding your ability to qualify for a mortgage. I know several loan officers that I trust and can recommend. If you would like to speak to a loan officer, I’d be happy to recommend someone.