If you’ve been thinking about buying a home, then you might be starting to panic about a down payment. A down payment is the cash amount you’re usually required to pay upfront and is usually a certain percentage of the total. So, for example, a $350,000 home would be $35,000.
When applying for a mortgage to buy a house, your down payment will contribute to the home’s overall purchase price and represent your initial ownership of the home. After that, your mortgage lender provides the rest of the payment for your house, and you’ll make mortgage payments monthly for a pre-determined amount of time.
Lenders require a down payment to show that you are serious about buying and have the funds to make payments. There are a few exceptions to that, however, and we’ll get into that here. Read on as we talk about everything you need to know about down payments.
Everything You Need To Know About A Down Payment
Coming up with enough money for a down payment is usually the most significant roadblock when it comes to buying a house. So let’s discuss how much you really need.
Minimum Down Payment Requirements
Though it’s not always required, you’ll likely hear the advice that you should put at least 20% down on a home to increase your chances of getting approved for a mortgage with the best rates. However, it’s important to note that most minimum down payments vary depending on the type of mortgage.
FHA loans are backed by the Federal Housing Administration and can require as little as 3.5% for first-time home buyers.
On the other hand, VA loans are guaranteed by the U.S. Department of Veterans Affairs and usually do not require a down payment. These loans are reserved for current and veteran military service members and eligible surviving spouses.
USDA loans, supported by the U.S. Department of Agriculture’s Rural Development Program, are another loan program that requires no down payment. They are for rural and suburban homebuyers who meet the income limits and basic requirements.
Most down payment requirements can also vary by lender and the borrower’s credit history. For example, loan providers might require a higher down payment if you have a meager credit score, while those who have excellent credit get better rates.
What Are The Pros And Cons Of Putting 20% Down?
Though you might not have to put 20% down on your new home, we thought it would be beneficial to look at the pros and cons of how a larger down payment can affect you.
If you can put 20% down, you’ll be able to avoid being required to buy private mortgage insurance (PMI). PMI is insurance that protects your lender if you default on your mortgage.
Another benefit of putting more of a down payment down on your home is access to better interest rates. The interest rate is known as the percentage of the principal or outstanding balance on your mortgage that your lender will charge you every month. The more money you put down, the less of a risk you seem to lenders.
In addition, when you put down a larger down payment, your overall loan is smaller, which means that you’ll pay less in interest over time. This also translates to smaller monthly payments.
Lastly, larger down payments give you a competitive edge over other buyers. People who have saved more for the home buying process usually have their finances in order, which means you’ll have fewer problems finding a lender.
Cons Of Putting 20% Down
We know that putting that large of an amount isn’t right for every buyer. There are a few drawbacks to saving a 20% down payment.
First, it can feel financially risky. Once you put money down on your mortgage, it’s not easy to get it back. So some might warn you to put a little less down and instead keep liquid cash and build your emergency fund.
Secondly, less money in your bank account means less money for those minor repairs your new home might need. The larger the down payment, the less money you’ll have to take care of things that arise when you first move into your home.
Lastly, it can take a long time to save 20%, and each month you’re not spending paying a mortgage, you’re wasting on rent, which many buyers don’t think is worth the larger down payment.
Can You Buy A House Without A Down Payment?
Yes! As we mentioned above, if you qualify for specific programs, you can buy a home with no money down. In addition, government-backed loans are insured by the government, making them less of a risk for lenders because it promises that the government will cover the financial loss if you default on the loan. This means that lenders will be more willing to give you better interest rates and less strict down payment requirements.
Both VA loans USDA loans have a zero-down payment guarantee, given that you meet the minimum qualifications set by the USDA and the Department of Veteran Affairs (VA).
Bottom Line When It Comes To A Down Payment
Though at the end of the day, there is no one-size-fits-all answer. An excellent place to start is to look at how your down payment will affect your monthly payment. Talk to your mortgage lender or use any number of online mortgage calculators to help you plan out how much you can reasonably afford. With just some basic info, they can break down your estimated mortgage and help you plan what down payment amount makes sense for you.
Talk to your local real estate agent too. They deal with home buyers every day and have some great resources and references to help you make sure your finances are in order. Do you still have questions? Contact 41 Realty Group today.