You are about to embark on the exciting journey of becoming a homeowner. But before he starts looking for a home, he must create a budget, which starts with securing financing and calculating the down payment amount.
The good news is that with rates at record lows, it’s a fantastic time to shop for a mortgage and buy a home.
The down payment is the amount you pay upfront, your so-called skin in the home-buying game. Here’s what you need to know to begin determining the right down payment amount for you.
Why do you need a down payment?
Most lenders require you to make a significant payment upfront as part of obtaining a mortgage. Depending on your income and credit history, as well as the type of mortgage and the lender’s specific requirements, you can expect to make a down payment ranging from 3% to 20% of the purchase price.
The bottom line: The more you put in, the less you’ll have to borrow, which can help you get a lower interest rate and lower your overall cost of borrowing.
The details of a down payment depend on various factors, including the details of your financial history and any special requirements from your lender. That said, each type of mortgage has its own set of rules.
Conventional Mortgages: With conventional mortgages, your lender determines your down payment. You can usually make a down payment as low as 3% to 5%. If you do not make a 20% advance, you will have private mortgage insurance with conventional mortgages. Lenders can add PMI to your monthly premium.
FHA Loans: The down payment on an FHA loan depends on your credit score. You could have a down payment as low as 3.5% of your score exceeds 580. If not, your down payment will be 10%.
VA Loans: VA loans are for military personnel and veterans, as long as they meet the criteria. You can view all of the eligibility criteria on the Department of Veterans Affairs website. If you qualify for a VA mortgage, you don’t have to make a down payment.
USDA Loans: With USDA loans, there is no down payment required. However, you must meet the eligibility requirements to qualify.
Fannie Mae HomeReady: With Fannie Mae, you could have a down payment as low as 3%. The HomeReady program suits those with lower incomes who have a credit score of at least 620, although you could receive better rates if you have a score above 680.
Freddie Mac Home Possible: The program allows homeowners to qualify for as low as a 3% down payment. It’s perfect for first-time homebuyers, seniors, or those looking to upgrade to larger homes.
Benefits of a large down payment
A larger down payment can give you more equity from the start. Think of it this way, if the purchase price is $200,000 and you make a $40,000 down payment, your mortgage will be only $160,000, giving you up to 20% equity right away. Helps you avoid private mortgage insurance and lowers your monthly payment relative to a smaller down payment. It will also save you money in the long run because you won’t have to pay interest on that $40,000.
Here’s an illustration of what your payments look like when you make a 3.5% down payment compared to 20% on a 30-year fixed-rate mortgage:
Advance Types, Compared
|PURCHASE PRICE||ADVANCE AMOUNT||PERCENT DOWN||INTEREST RATE||PRINCIPAL AND MONTHLY INTEREST||TOTAL MONTHLY PAYMENT WITH INSURANCE AND TAXES|