Ready to become a homeowner? One of your first considerations should be how you will finance your purchase, including the down payment. According to a recent survey, 87% of homebuyers will secure a mortgage and make monthly payments to cover the cost of their home for the term of the loan.
Before you “take the plunge,” it's important to understand a few key things about a mortgage down payment. How much money will you need and what are the best ways to save for (or finance) your down payment?
According to the previously mentioned survey, 35% of homebuyers think they need to put down 16% to 20% of the purchase price when taking out loan. Fortunately, there are many types of mortgages available, and some require much lower down payments.
FHA (Federal Housing Administration) and conventional loans are two of the most common mortgages. With an FHA loan, you’re required to put down only about 3.5% of the purchase price. That means, if you’re buying a home for $200,000, your down payment will be $7,000.
On the other hand, the down payment on a conventional mortgage may be as low as 3% of the purchase price, allowing you to get into that same $200,000 home with only $6,000 down.
While putting down the minimum may help you get into a home faster, there are advantages to a larger down payment. Money down goes toward the total cost of your home, so a larger down payment reduces the amount being financed and lowers monthly payments as well as the interest you will pay over the life of the loan.
In addition, mortgage insurance is often waived for buyers who put down 20% or more of the purchase price on a conventional loan. In this case, a bigger down payment could reduce how much you pay on your mortgage each month by $40. Better interest rates may also be available for buyers who put down at least 20%.
It’s important to remember that closing costs must also be taken into consideration. They can include everything from appraisal and title search fees to home inspection and property survey expenses. Returning to our example, a conventional purchase of that $200,000 home could include closing costs of up to $10,000. That, along with your 3% down payment, means you will need about $16,000 to make the purchase.
When the home market is tight, and prices are high or rising, it might seem difficult – or even impossible – to afford a down payment. Fortunately, there are ways to secure the cash you need for financing.
How you fund your down payment depends upon your individual circumstances. Most first-time homebuyers will tighten their budget and save money over time. If that sounds like you, keep reading! Current homeowners can apply existing property equity toward money down on a new house, and other borrowers may be gifted the money from a relative, which in most cases is an acceptable form of financing for a down payment.
When it comes to putting aside funds, it’s wise to start with a budget. Tracking and planning for monthly expenses makes it possible to see where your money is going and identify areas where you could save. Do you really need that pricey morning latte, or would it be better to put that money in the bank for use toward the down payment on a home? Scrutinizing your spending and automating your savings will help you build your down payment more quickly.
As you save, make sure you’re handling your money wisely. Generally, cash stuffed between the mattress or hidden in the cookie jar may not be eligible as money down. Your lender needs to see a paper trail as proof that you have the cash on hand, and possibly its origin. Keep records and have the cash in the bank before you apply for a mortgage.
If you don’t have an existing property or a wealthy relative and already operate on a bare bones budget, most states offer assistance programs to help you get the money needed for a down payment. The Nebraska Investment Finance Authority (NIFA) is just one example.
NIFA offers programs that allow first-time homebuyers to finance their down payments. If you qualify with a credit score of at least 640 and your debt-to-income ratio is no more than 45%, you may be able to purchase a home with only $1,000 down. Perhaps best of all, buyers can finance the down payment through NIFA and then take out an FHA or conventional loan for the remainder of the mortgage.
Having a down payment is an important first step when applying and getting approval for a mortgage, but there are other considerations. The first is your credit score. The minimum credit score for an FHA loan is 580, and banks often have an overlay – an additional rule – that requires an even higher credit score for an FHA loan. Consistent late payments on rent, a current mortgage or other loans may make it difficult to achieve the credit score needed to qualify for home financing, but that doesn’t mean impossible.
Even if you’ve faced a few financial mishaps and your past credit is a little less-than-perfect, it may be possible to receive financing. The key is to demonstrate a present commitment to sound financial management, and this is one area where a qualified loan officer can help.
Before you start your home search, find a loan officer you like and trust! They will review your finances and help you develop a plan to save for a down payment, if you need one, and they can offer good advice if you need to clean up your credit. With the guidance of a qualified, dedicated loan officer, your homeownership aspirations can come true.
The articles in this blog are for informational purposes only and not intended to provide specific advice or recommendations. When making decisions about your financial situation, consult a financial professional for advice. Articles are not regularly updated, and information may become outdated.