There's a myth that you can only buy a home if you have a 20% downpayment at your disposal. But according to the National Association of Realtors, for those who financed their homes, the average downpayment was actually just 10% and for first-time homebuyers, it was even lower at 6%.
The 20% downpayment myth didn't just come from thin air. Many people have that benchmark in mind, because if you do put down less than 20% to buy a home, you may be subject to increased monthly costs, in the form of potentially higher interest rates and private mortgage insurance, or PMI.
PMI protects the lender in case the borrower isn't able to make the mortgage payments and is typically required for conventional mortgages - loans with balances of $417,000 or less for the majority of the country and $625,000 or less for higher-priced areas.
This protection comes at a high ongoing cost, though. For a $400,000 home where you put down 10% ($40,000), PMI is estimated to be $117 a month. That's in addition to your mortgage, homeowners insurance and homeowners association fees. Luckily, PMI doesn't stick around for the life of your loan - just until your loan-to-value ("LTV") decreases to 78% to 80% (i.e. you can request to have it removed once your LTV decreases to 80% and if not requested, the mortgage servicer is required to remove it when your LTV decreases to 78%).
The good news is there are some ways to make a downpayment of less than 20% without having to pay PMI -- here's how.
In February, Bank of America introduced a new mortgage program, the Affordable Loan Solution Mortgage, which allows eligible borrowers to put down as little as 3% without requiring PMI. The program, a partnership between Bank of America, Freddie Mac, and non-profit Self-Help Ventures Fund, is targeted towards low- and moderate-income borrowers. To qualify, borrowers can't make more than the HUD area median income and must have a credit score of 660 or higher.
As an example, for 2016, New York City-based borrowers with a household of one would need an income below $65,200 to qualify for the program. The median income threshold could rule out a lot of potential borrowers. Even still, Bank of America expects to originate $500 million of loans under the program this year.
SoFi, an online lender initially focused on offering a student loan refinancing product, now originates mortgages in 25 states and Washington D.C. SoFi's mortgages allow borrowers to put down as little as 10% without requiring PMI.
In addition, while traditional lenders may have firm debt-to-income limits (generally up to 45%), SoFi has more fluid debt-to-income limits, which may allow borrowers to ultimately qualify for more financing, up to a maximum of $3 million.
Similar to other online financial companies that are able to offer more interest rate benefits or decrease costs for borrowers because of a lower cost structure, SoFi doesn't charge any application, origination or other lender fees, which could amount to between $500 and 1,500 savings compared to other lenders.