November 13th, 2018 6:47 AM by Jackie A. Graves, President
Anyone who has
written a down payment check knows how unsettling it is to hand over that much
money in one shot. Before you can get to that point, you have to save, save,
save — and that doesn’t come easily to everyone.
figure out how much to put down on a house, you need to know the basics about
what a down payment is and how it factors into your home purchase. Let’s begin.
is a down payment?
A down payment is
the money that you give to the seller at closing when you buy a home. The rest
of the purchase price comes from the money you borrow.
are expressed in percentages. Let’s say you’re buying a $300,000 house. If you
put 10 percent down, your down payment is 10 percent of that amount, or
$30,000. A 20 percent down payment on that house would be $60,000.
programs don’t require a down payment, but in most cases, you’ll need to have
skin in the game. Let’s explore what that looks like.
much should you put down on a house?
How much you
should put down on a house is a personal decision that mainly depends on your
finances and what loan program you use.
saved up a good chunk of money over time or have a windfall you can apply to a
down payment, you’re ahead of the game. But if you’re just starting out, it
could take months or even years to save for a down
payment. There are closing costs to
programs allow you to put zero down while others require just 3 percent down
for a conventional loan. But there’s a catch: lenders typically charge a higher
interest rate to mitigate their risk, which means you’ll pay more interest over
the life of the loan.
When you put
down more money, your monthly mortgage payment and your loan-to-value ratio
will be lower. The LTV ratio, which divides the loan amount by the home’s
value, plays a key role in your mortgage approval. It also helps determine how
much money you can borrow from a lender.
20 percent down payment myth
that you have to put 20 percent down to get a mortgage isn’t true. You have
more options than you think.
When you make
a down payment of less than 20 percent, though, lenders view you as a riskier
borrower. That’s where mortgage
insurance comes in. Mortgage insurance is a policy that you pay
for, even though it protects the lender. If you fail to repay the loan and end
up in foreclosure, the policy reimburses the lender for financial losses.
insurance is costly. You can cancel it after gaining at least 20 percent equity
in your home in most cases. To avoid it, you’ll need to plunk down at least 20
A higher down
payment can result in getting a lower interest rate and qualifying for a larger
loan. The more you put down, the stronger your offer looks to a seller as well.
is the average down payment on a house?
down payment on a house varies depending on the type of buyer, location and
home prices in a given area. For example, first-time buyers typically put less
money down than repeat buyers, who can use the proceeds from a home sale to
make the down payment on their next home.
down payment on a house is 13 percent for buyers overall, and 7 percent for
first-time buyers, according to the National Association of Realtors’ 2018
Profile of Home Buyers and Sellers.
program may have certain minimum requirements for a down payment or none at
all. But loans that don’t require money down come with fees.
programs and minimum down payment requirements
already have a down payment amount in mind. Here’s a look at the minimum
requirements of some common loan types.
mortgage: 3 percent to 5 percent
and Freddie Mac are companies that propel access to U.S. mortgage credit. They
don’t lend money but they back programs offered by conventional lenders. These
special programs require just 3 percent down, but they may have income
restrictions and more stringent credit requirements.
require 5 percent to 15 percent down for other types of conventional loans.
When you get a conventional mortgage with a down payment of less than 20
percent, you have to get private mortgage insurance, or PMI.
cost of PMI varies, depending on your credit score, the size of the down
payment and the loan amount. Some lenders might waive PMI, but they often
charge a higher interest rate to account for the greater risk.
loan: 3.5 percent
mortgage insured by the Federal Housing Administration, the minimum down
payment is 3.5 percent. That means you’ll receive the maximum financing FHA
offers at 97.5 percent, but, you need a FICO score of at least 580.
You can make
a higher down payment on an FHA loan. To encourage that, the FHA charges
lower borrowing costs if your down payment is 5 percent or more. One difference
between the FHA and private mortgage insurance is that the FHA doesn’t charge
more to people with lower credit scores.
notable drawback to putting down less than 10 percent on an FHA loan. When you
do this, you cannot cancel annual mortgage insurance premiums. You’ll pay those
for the life of the loan or until you refinance or sell.
and USDA: 0 percent
Department of Veterans Affairs and the U.S. Department of Agriculture guarantee
zero-down payment loans for qualified homebuyers.
VA loans are
available to most members of the armed forces and veterans. USDA loans are available in designated
rural areas. The USDA has maps on
its website that show which areas are eligible.
loan types, you borrow from a regular lender, but the VA or the USDA guarantees
the loan. There is no mortgage insurance, but you pay a guarantee fee.
down payment you can afford
alone if you’re bewildered by all the down payment options. This is especially
true for first-timers who have saved more than the minimum down payment they’re
Keep in mind
your down payment can consist of your personal savings plus gifts from
relatives and grants from local governments or even employers. Cash gifts can’t
be loans, and the gift giver needs to write a gift letter to make that clear. A
lender will require documentation to source where the funds came from, too.
important to ensure you’re not depleting (or neglecting to fund) your
retirement savings account or your emergency fund to buy a home. Doing so could
put you at a disadvantage to retire comfortably later on. Draining your
emergency fund isn’t ideal because you might need to make costly repairs after
moving in or run into a financial hardship, and you won’t have a cushion to
fall back on.
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