Typically mortgage lenders prefer a 20% down payment, but most first-time home buyers can’t afford 20%, so they put down much less. Saving enough money to put down when purchasing a home is often the biggest hurdle for most home buyers. Do you ever wonder how much you really need?
What and Why the Down Payment?
A down payment is the cash that you must pay to the bank upfront to get a loan. It’s deducted from the total amount of your mortgage and represents the beginning equity in a house and property.
The Benefits of a 20% Down Payment
Mortgage lenders like to have 20% down payments. That’s $50,000 on a $250,000 home; that is a lot of money! However, if you can come up with the full 20%, there are all sorts of other benefits too:
• Lower interest rate
• Lower upfront fees
• Lower ongoing fees
• More equity in your home immediately
• A lower monthly payment
Of course there is some other issues to consider: The down payment is not the only upfront money you have to come up with. There are the usual closing costs, and earnest money to consider as well. If this sounds like a bit too much money for your current situation, let’s explore some lower down payment options.
Lower Down Payment Alternatives
Did you know that you can still buy a home with as little as 3% down. The Federal Housing Administration (FHA) is a government agency charged with helping home buyers (especially first timers) get approved for a mortgage loan. They do that by assisting mortgage lenders in making loans by guaranteeing a portion of the balance. That’s how you can put less money down. Fannie Mae and Freddie Mac, the government-sponsored companies that drive the residential mortgage credit market, have 3% down payments on home loans. There are other lenders are also offering low down payments — and even no down payments — as incentives. Contact me for a list of potential lenders. Also, if you’re an active or retired service member you may have access to zero down payment programs through the Department of Veterans Affairs (VA loan).
The Right Down Payment Amount
So, what do yo think? Do you want to put down $50,000 or $7,500 on that $250,000 home? Or does zero down sound good? It’s your choice, but there is always some fine print. For example, a lower down payment makes you a bigger risk in the eyes of the lender. That’s why it will look for help from one of those government programs to guarantee a portion of the loan. Because of that, you pay for the guarantee. This is called called mortgage insurance. There will be an upfront fee and an ongoing charge built into your monthly payment amount.
Remember, lenders are required to disclose all fees and it’s always a good idea to shop around with multiple mortgage providers to get your best deal. Plus, the more you explore your options, the more you’ll learn about the process.