Are you a homebuyer trying to figure out how much you should put down on your house? Buying a house can be overwhelming, and making your down payment can be especially stressful if you don’t have all the correct information. In this article, we’ll help you understand the importance of a down payment when buying your home.
What is a Down Payment?
A down payment is money you pay upfront to the seller of the home. The total purchase price of the home is split between your down payment and the remainder that you choose to finance through your lender.
Many buyers put down as much as 20% of the purchase price, which lets you avoid private mortgage insurance, but there are loan options that make it possible to put a down payment as low as 3.5%.
Your down payment will be an important aspect when you decide to buy your home. For example, if you don’t have a great credit score, but have a sizable down payment, many lenders will give you more serious consideration than you would get without a substantial down payment.
Down Payments: What You Need To Know
1. The size of your down payment is completely up to you.
There are many factors in determining the right amount for you to put down on your home. Depending on the specific mortgage you choose and its guidelines, you may be able to put as much or as little down as you’d like. Ultimately, you can decide what is right for you. It all depends on how much you feel comfortable putting down.
Determining the size of your down payment is up to you and depends on your unique financial picture. Factors including how much you already have saved and how much you feel comfortable putting down will influence your decision. If you end up choosing to make a larger down payment, you won’t have to borrow as much money in the long run. If you decide to make a smaller down payment, your monthly payments will be larger.
Depending on the specific mortgage you choose and its guidelines, you may be able to put as much or as little down as you’d like.
2. The larger your down payment, the lower your monthly payments and interest rate may be.
One determining factor in your final decision will be your loan-to-value ratio (LTV). This is a financial term used by lenders to express the ratio of a loan to the valueof an asset purchased. Your lender may offer better interest rates when your LTV is lower. So how do you lower your ratio? An increase in your down payment will lower LTV and will lower the lender’s risk.
It’s simple – if you borrow less money, you will have less to pay back and will owe less in total interest. This can make a huge difference in your long-term finances and the total you pay over the life of your mortgage.
If you put down at least 20% of your purchase price, you won’t have to pay Private Mortgage Insurance (PMI). Private mortgage insurance is a type of mortgage insurance you may be required to pay for if you put less than 20% down on your new home. PMI protects the lender against potential loss and generally costs anywhere from .5% to 1% of the loan amount. This can add thousands of dollars a year to your overall housing costs until your home’s equity reaches 20%, when PMI is no longer required.
3. There are many different loan options.
There are special loan programs that may work for you. Many options exist including Federal Housing Administration (FHA) loans which are insured by the federal government. They require as little as 3.5% down and typically carry lower interest rates than conventional mortgages. You may be able to qualify for these loans with a credit score below 600.
Another loan option is the VA Loan for eligible active duty service members and veterans. VA home loans are backed by the Department of Veterans Affairs (VA) and typically require no money down, though you are welcome to make a down payment to reduce the total amount you borrow.
USDA loans are another option for homes located in USDA-defined rural areas. These loans typically offer no down payment requirements, flexible qualifying criteria, and minimal cash to close.
4. There are many ways to start saving for a down payment.
Making that first down payment can be a very intimidating process, but there are many ways to start saving.
To start, it is important to set up a dedicated savings account. Check with a local bank to see what options you have available.
One strategy is taking additional income and saving the difference. If you earn a raise at work, put the difference between your old paycheck and current paycheck into your down payment savings account. Another way to save for your down payment is budgeting. Without a budget, you won’t know where you are overspending or underspending and everything in between. Budgeting allows you to create a spending plan for your money. It will keep you out of debt, or help you work your way out of debt depending on your situation. Another way to save is to always be honest with your money. If you have some debt and bills that need to be paid, don’t pretend your money situation is in good condition and avoid additional unnecessary spending.
5. The down payment isn’t the only thing you’ll need to pay upfront.
In addition to the down payment, you’ll need to consider closing costs including fees, taxes, insurance, and other loan origination expenses that make up your total cash to close. The amounts of your down payment, closing costs, and total cash to close will be itemized on the Closing Disclosure document you receive at least three days before your closing date. You’ll need to pay the cash to close amount at closing in order to complete the purchase of your home.
Other upfront costs of homeownership can include moving expenses, new furnishings, as well as any initial renovations or repairs. You’ll want to factor these into your overall mortgage math and budget planning.
To Sum It All Up
Your down payment is a very important step in becoming a homeowner. It is the foundation you lay for yourself as you begin this exciting journey to owning your home. It may seem overwhelming at first, but there are many different ways to make the down payment process less stressful. Through different saving strategies, loan options, and down payment protection, there are many ways to make down payments less intimidating.
With a low barrier to entry on many loan solutions and down payment savings strategies, you’re closer than you may think to walking into the doors of your new home.
Learn more about down payments and how to start planning your home buying journey.
The included content is intended for informational purposes only and should not be relied upon as professional advice. Additional terms and conditions apply. Not all applicants will qualify. Consult with a finance professional for tax advice or a mortgage professional to address your mortgage questions or concerns. This is an advertisement. Prepared 5/22/2018.