20% down payment is anything but standard. Making a smaller down payment will involve some form of private mortgage insurance (PMI). This is a fee paid to limit the lender’s risk when there is a lower down payment. However, there are plenty of great options available for those without a full 20%. Here are a few:
Conventional loans are available with as little as 3% down for first-time homebuyers. The cost of the mortgage insurance depends on the borrower’s credit score. If you are not a first-time homebuyer than as little as 5% is needed (can be gifted funds).
There is also Conventional HomeReady and HomePossible programs available for those who do not currently own a home. These income based programs only require 3% down (being a first-time homebuyer is NOT required) and offer a reduced mortgage insurance and better interest rates. Many of Denver’s neighborhoods do not have an income limit, meaning many borrowers will qualify for this program.
FHA home loans are another great low down payment option, requiring only 3.5% down (can be a gift). FHA is also looser on qualifying requirements; minimum credit score is 580 while also being more forgiving with derogatory credit (ie: bankruptcy, foreclosure, collections, etc). FHA does have a funding fee and FULL term PMI for borrowers with less than 10% down payment. Borrowers with lower credit scores may be better off with an FHA loan. The mortgage insurance for a $300,000 FHA loan will cost $216/mo, even with a credit score as low as 580.
Also, Colorado has several homebuyer grants available; Denver MMA and CHFA. These grants can work with either FHA or Conventional (and other programs). These are income based program that offer 4% forgivable grants at closing, typically at higher interest rates and fees. They do not require you to be a first-time homebuyer, but do stipulate you cannot currently own a property.
If real estate values and interest rates are going up, a prospective home buyer should buy as soon as possible (even with PMI) rather than waiting to save up a larger down payment. If values are going up, say, 4% per year, today’s $300,000 home will cost $312,000 a year from today, $325,000 two years from today. There is also the uncertainty about whether mortgage rates will be as low in the future as they are now. Higher rates would obviously increase the cost of owning a home.
Please feel free to reach out if you have any additional questions.