Buying a home is a significant milestone and a dream for many people, as it gives a sense of accomplishment and security. However, owning a home isn’t that easy a dream to achieve. You may be ready to explore your home-buying opportunities but would get deterred due to a lack of available funds for a down payment.
You may not be the only one who faces this struggle though. Making a large down payment may be the key to unlocking the door to your ideal residence, but ensuring the availability of such money is certainly not a piece of cake.
Let’s plunge into a discussion about the down payment and how can you make your task of putting down money relatively convenient.
What is a Down Payment?
When you are in the home-buying process, you can finance your home through a mortgage loan, but a fraction of the purchase price needs to be paid upfront by you, which is referred to as a down payment.
The lender would view your down payment as a sign of your ability to manage your finances and commitment to the purchase of the property. How much you decide to put down can vary and depends on several factors, such as the type of mortgage, the lender's requirements, and the buyer's financial situation.
Why Putting Down Money is Required?
Making a down payment gives you a right to ownership of the house you are purchasing. Also, if you are making a fraction of the payment yourself, the amount of borrowed money gets decreased, which means you have to pay a lesser mortgage and principal payments.
Further, putting down money can help assure lenders that you are financially responsible and that you would be able to make your mortgage-related payments later on as well. Making a substantial down payment can even increase your chances of securing a mortgage with better interest rates and lesser mortgage payments.
What are the Minimum Down Payment Requirements?
Different types of mortgage loans have different down payment requirements. The standard benchmark for down payments on homes for conventional loans is 20% of the purchase price. For instance, to buy a home worth $300,000, you would need to make a down payment of $60,000 (20% of the total cost). However, depending on your financial situation and the loan program you select, you might only need to put down 3% of the total purchase price, which in this case would be $9,000. To qualify for a conventional loan (a 30-year fixed mortgage), you typically need to put down between 3 to 20 percent of the purchase price.
The requirements for the down payments for government-backed loans are usually less. Fulfilling requirements for the Department of Agriculture (USDA loan) or Veterans Affairs (VA loan) programs would make you eligible for a mortgage and you do not have to make any down payment. Other loan options that require low or zero down payments include:
-
Federal Housing Administration (FHA) Loan
If you are applying for an FHA loan, you only need to pay 3.5% of your home’s price. However, keep in mind that you will still be required to pay mortgage insurance premiums to secure the lender against the risk of a loan default. -
Conventional 97 & HomeReady Mortgages Offered by Fannie Mae
Both of these loans only require a minimum down payment of 3 percent. HomeReady mortgages are specifically created to cater to creditworthy borrowers whose income falls below the median income in their area.
These loans provide wider financing options for homes located in areas designated as low-income, minority, or affected by disasters.
The Conventional 97 mortgages aim to assist creditworthy home buyers who may qualify for a mortgage but lack the necessary resources for a larger down payment. -
State & Local Programs
These programs can assist you in obtaining a home by making a low down payment. These programs can provide various incentives for homebuyers, such as down payment assistance, closing cost assistance, or grants. Furthermore, some towns also offer additional incentives to attract new residents. These incentives can range from student loan forgiveness to free land for building on.
Even though these programs might not cover your entire down payment, they can still help you save money in other areas and lower the cost of buying a home for you. So don't give up if you're having trouble saving money for a down payment. You have a lot of options at your disposal for realizing your dream of home ownership.
Are there any Benefits of a Large Down Payment?
Arranging money for a down payment often results in people delaying their home buying. However, others may have enough money to make a large down payment and cash on the associated benefits.
-
Demonstrate Financial Capability
One of the major reasons why a down payment is required is that it exhibits your ability to save money and your dedication to the purchase. A larger payment certainly reinforces this! It also reduces the risk for the seller or lender, as they get an assurance that you are financially capable of making the loan payments. You become a competitive buyer by making a large upfront payment! -
Lower Monthly Mortgage Payments
The larger your down payment, the smaller the borrowed amount, which in turn leads to lower monthly payments. If you want to keep your monthly expenses low, this can be especially helpful for you. -
Increase Approval Chances
Making a larger down payment can increase your chances of getting a loan approved, especially if your credit score is less than ideal. This is because a down payment lowers the amount of your borrowed money, and hence the associated risk to the lender gets decreased as well. -
Lower Interest Rates & Terms
When you are making a large down payment, you are most likely to secure a lower interest rate, which can help you save a lot of money. There is a higher probability of getting favorable loan terms as well. -
No PMI
If you put down 20% or more, you won't have to pay private mortgage insurance (PMI). Otherwise, PMI can be an extra expense that you would have to bear as part of your home loan costs.
However, putting down a larger down payment is not a feasible option all the time. If you're unable to put down 20%, there are loan programs available that allow you to put down as little as 3%. Keep in mind that putting down less than 20% may require you to pay PMI, which can increase your monthly mortgage payment.
Do the Negatives of a Large Down Payment Need to be Weighed?
You may face liquidity issues if you are going for a large down payment, as it can reduce your available cash, which can prove to be challenging in the case of unexpected expenses or emergencies. Further, as the money is being dedicated to the down payment, you may not be able to utilize it for other purposes or investments
What are the Factors to Consider when Deciding how much to Put Down?
How much down payment you have to make is not always in your hands, and is dependent on several factors, as discussed above. However, the flexibility offered by lenders can be utilized if you take the relevant factors into consideration.
-
Current Housing Market Trends
In a competitive housing market with multiple offers, a higher down payment can make your offer more appealing to the seller, as it reduces their risk. You would appear as a competitive buyer. -
Personal Financial Situation
Evaluate your financial situation before deciding how much you can afford to put down on a home. This includes taking into account your debts, expenses, and savings. A larger down payment might be a wise decision if you want to reduce your monthly mortgage payments. However, it might lead to lower cash in hand. -
Interest Rates & Loan Terms
To make the right decision, you have to consider the loan terms being offered with different percentages of down payments. A larger down payment may lead to a lower interest rate, saving you a lot of money and vice versa. -
Future Plans
What are your future plans for the home? If your stay in your home is going to be a longer one, your large down payment can save you money by lowering your interest rate and mortgage payments.
Is any Assistance available for the Down Payment?
Saving money for a down payment isn’t a smooth ride. While the majority of the buyers save up the old-fashioned way, some have discovered innovative methods to finance their down payment, such as liquidation of assets, gifts from family/ friends, provident funds, down payment assistance programs, or proceeds from the sale of a previous home.
Final Thoughts
The gist is that while purchasing a home and financing it through a mortgage, you need to be careful about the loan type and lender requirements. How much down payment is required and what can you afford are crucial factors to consider. When deciding how much to put down, consider the loan requirements as well as your financial situation, home affordability, and long-term goals.
Saved
