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Is a 20 percent down payment out of reach? How to get around that

  • Big home-price gains make a 20 percent down payment ever harder.
  • Private mortgage insurance can be a better deal than an FHA-insured mortgage.
  • In high-cost areas, a piggyback mortgage deal can be the ticket to buying.

Coming up with the cash to make a 20 percent down payment on a home is becoming increasingly impractical.

With home prices up more than 30 percent during the past five years — and nearly 7 percent in the past year alone — it now takes more than $40,000 to make a 20 percent down payment on the median priced home of $236,000, according to the National Association of Realtors. In high-cost metropolitan areas, 20 percent down is a six-figure undertaking.

In fact, the average down payment last year was 6 percent, according to Attom Data Solutions. Mortgage insurance, which is typically required on loans with less than 20 percent down, ballooned to $760 billion last year — a 20 percent increase over the past year and nearly double the level of 2011, according to Inside Mortgage Finance.

If you're going to offer less than a 20 percent down payment, it pays to figure out the best financing deal.

There are two popular types of mortgage insurance: coverage you pay for if you opt for a loan insured by the Federal Housing Administration and private mortgage insurance tied to a conventional mortgage.

During the financial crisis, private mortgage insurance lenders went into hibernation, producing just 15 percent of mortgage insurance volume, compared with nearly 70 percent for FHA-insured loans. Today, PMI is back in play, accounting for 35 percent of mortgage insurance volume last year, according to Inside Mortgage Finance.

"Coming up with the cash to make a 20 percent down payment is becoming increasingly impractical."

Borrowers who can make a 10 percent down payment also have the option of taking out two mortgages instead of buying mortgage insurance. With an 80-10-10 loan, the primary mortgage covers 80 percent of the loan value; a second mortgage, often called a piggyback, covers 10 percent; and the other 10 percent is the down payment.

"With rates rising, and refinancing business dropping off, lenders are more eager for purchase mortgages, including an 80-10-10," said Tim Lucas, editor of Mortgage Insider.

Below is a cheat sheet for landing the right deal for a low down payment for your situation. And before you start shopping lenders, check out a national database of more than 2,000 assistance programs that just might reduce the out-of-pocket cash you need to buy a home.

VA-backed mortgages for Vets. Military veterans should be sure to work with a lender experienced in mortgages backed by Department of Veterans Affairs. The 0 percent down payment required for a VA-backed loan is hard to beat (though there is an upfront fee of 2.15 percent or 3.3 percent of the loan amount that can be rolled into the mortgage.)

Down payment < 10 percent and good credit: Advantage PMI Your credit score determines the cost of your PMI. With a FICO credit score of at least 760, the annual cost of PMI is 0.41 percent of your loan amount if you make a 5 percent down payment.

A FICO score of 740 to 759 costs 0.59 percent and between 700 and 719 it's 0.73 percent. All of those fees are less than the flat 0.85 percent annual mortgage insurance charged on an FHA-insured mortgage. (Credit scores don't factor into the insurance cost on an FHA-backed mortgage.)

Mortgage services signage outside a Berkshire Hathaway Home Services office in Montclair, N.J.
Adam Jeffery | CNBC

Moreover, when you have a high FICO score, the "adjustment" to a conventional mortgage because you are making a low down payment will add 0.25 percent to your interest rate if you make a 5 percent down payment, or 0.75 percent if you make a lower down payment. Both of those charges are less than the 1.75 percent charged on FHA-insured mortgages with low down payments, and the cost of an 80-10-10.

"If you have a good credit score, private mortgage insurance is going to likely be your best option if you're putting down less than 20 percent," said Joe Parsons, branch manager for Caliber Home Loans in Dublin, California.

Down payment < 10 percent and iffy credit: Advantage FHA-insured. Sort of. If your FICO credit score is hovering around 700 (or lower), PMI becomes much pricier. With a 5 percent down payment and a FICO score of 680 to 699, the PMI charge jumps from 0.41 percent to 1.08 percent, and the interest rate adjustment jumps from 0.25 percent to 1.25 percent. Have lenders run the numbers for you for PMI and for an FHA-insured loan.

"Even if the FHA-insured mortgage has a lower monthly payment, you may still be better off paying a bit more for the conventional loan with PMI," said Parsons. The advantage of a loan with PMI is that once you have 20 percent equity, your lender is required to drop the insurance. The insurance fee on an FHA-insured mortgage is permanent; the only way to get rid of it once you have 20 percent equity is to refinance. If rates are higher, you may not want to make that deal.

Down payment of 10 percent and high mortgage smount: Advantage piggyback Mortgage insurance (both flavors) is only available on loans that stay below certain federal limits. In 2017, the loan limit for a conventional mortgage is $424,100 in most regions and $636,150 in high-cost areas. For FHA-insured mortgages, the general limit is around $275,000 and up to $636,150 for high-cost areas. If you want to borrow more than that, an 80-10-10 may be the ticket to landing a mortgage.

"It's a bit more hassle, in that there are two loans that need to close," noted Mortgage Insider's Lucas. The lender handling the primary mortgage will coordinate getting the piggyback, which may come from a different lender. You may pay a few hundred dollars to open the piggyback but shouldn't be charged again for the appraisal, title insurance and other requirements you've covered with the primary. Piggybacks are typically home equity lines of credit (HELOC), which are variable rate loans. If as expected the Federal Reserve continues to raise interest rates, the cost of the HELOC will rise.

"But it's just 10 percent of your purchase price, so the impact should be minimal," Parsons said.

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