May 22nd, 2018 6:49 AM by Jackie A. Graves, President
Lenders prefer 20% down payments but there are government-backed
programs that require much less. Just keep your eye on the fees.
The down payment. Cue
the dramatic, fear-filled suspense music. Yeah, it’s scary. Coming up with
enough cash to put down when buying a house is the single biggest roadblock for
most hopeful home buyers. But how much do you really need?
What is a down payment?
A down payment
is the cash you pay upfront to get a home loan. It is deducted from the total
amount of your mortgage and represents the beginning equity — your ownership
stake — in a house and property.
Benefits of 20% down payment
are looking for 20% down payments. That’s $60,000 on a $300,000 home. (There’s
that scary music again.) With 20% down, lenders will love you more. First off,
you’ll have a better chance of getting approved for a loan. And you’ll earn a better mortgage interest rate.
There are all sorts of other benefits too:
Of course there is
one big, juicy caveat: The down payment is not the only upfront money you have
to deal with. There are loan closing costs and earnest money to consider as
well. Before the dramatic music returns, let’s explore some lower down payment
Evaluating low down payment alternatives
actually buy a home with as little as 3% down. Why did we wait so long to give
you that good news? Well, let’s provide the details first before we weigh the
pros and cons.
Housing Administration is a government agency charged with helping home buyers
— especially first timers — get approved. The FHA does that by assisting
mortgage lenders in making loans by guaranteeing a portion of the balance.
That’s how you can put less money down — in fact, as little as 3.5%. And FHA loan rates are
among some of the lowest you’ll find.
Mae and Freddie Mac, the government-sponsored companies that drive the
residential mortgage credit market, have 3% down payments on home loans. Some
major commercial lenders are also offering low down payments — and even no down
payments — as incentives to spur loan demand.
And if you’re
an active or retired service member, or live in a rural area, you may have
access to zero down payment programs
through the Department of Veterans Affairs or the Department of Agriculture’s
Rural Development program. It’s always a good idea to ask a lender about down
payment options when you’re shopping for a mortgage.
What is the right down payment amount for you?
So, which is
it: Do you want to put down $60,000 or $9,000 on that $300,000 home? Or does
zero down make you spring into a happy dance? Sounds like a pretty easy
decision, right? But you knew there would be fine print.
“A lower down payment
makes you a bigger risk in the eyes of the lender.”
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. The thing is, you pay for the guarantee. It’s called mortgage
insurance. There will be an upfront fee and likely an ongoing charge built into
your monthly payment.
Some of the
programs don’t require mortgage insurance, but will charge an “upfront
guarantee fee” or “funding fee.” Whatever you call it, a fee is a fee. And as a
higher risk, you’ll likely pay a higher interest rate for the life of the loan
in addition to the other fees.
to go with the lowest all-in upfront charges when trying to buy a home. But the
key to building net worth is to buy smart, especially when it comes to such a
large purchase as a house.
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. Taking time to compare
the fees from different lenders can save you thousands of dollars over the long
payment is just the first financial hurdle. The monthly payments last a lot
longer. Let’s get out of here before that spooky music comes back.
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