Down Payments – What to Plan For

A home down payment is the part of your property purchase price that you pay upfront and is not financed by a mortgage lender as a part of your loan. This essentially secures your spot as the new homeowner and produces trust between you and the seller. This number is expressed as a percentage of the price. For instance, if you are purchasing a $100,000 home and you decide to put $10,000, or 10%, towards the purchase, you will need to acquire a mortgage for the remaining $90,000.

When you are applying for a home mortgage, the down payment is your contribution towards the purchase and serves as your initial ownership stake. Your chosen lender will provide the rest of the purchase amount in order to buy the property. Lenders will require a down payment for most mortgages. There are a few exceptions to this rule, like USDA and VA loans, that are supported by federal funding.

Why Do Mortgage Lenders Require A Down Payment?

There are very few mortgage programs that do not require any down payment. This is because a down payment helps reduce risks for lenders in the following ways:

• Saving money for a down payment takes time, patience, discipline, and budgeting. These traits are favorable for successful homeownership.
• Homeowners investing in their purchases with their own money are less likely to stop paying their mortgages.
• If your lender must foreclose and sell the house, they are not responsible for the entire purchase price, limiting the losses if the property sells for less than the remaining loan balance.

What Are the Minimum Down Payment Requirements?

You have probably heard that you need at least 20% for your down payment. This is not necessarily true. While having this amount will help increase your chances of getting approved for a decent rate on your mortgage, this is not a requirement.  Down payment minimums are dependent on the mortgage type:

• Conventional loans: Conventional mortgages are not federally backed but do follow the guidelines that have been set by government-sponsored firms Freddie Mac and Fannie Mae. Some conventional loans require as little as 3% down.
• FHA loans: Backed by the Federal Housing Administration, this mortgage type only requires 3.5% down.
• VA loans: For military service members, veterans, and surviving spouses, VA loans are guaranteed by the US Department of Veterans Affairs. This mortgage type typically doesn’t require a down payment.
• USDA loans: USDA loans are backed by the US Department of Agriculture’s Rural Development Program. They are available for rural and suburban buyers that meet the program’s requirements and income limits. These loans also do not require a minimum down payment.

It is important to note that down payment requirements can also vary from lender to lender and are also dependent on your credit history. For example, an FHA loan requires only 3.5% down for homebuyers with a credit score of 580 or higher but this minimum increases to 10% for individuals with a credit score between 500 and 579. All this information may seem overwhelming, but do not stress. Our agents will work with you to ensure that your down payment amount is something you are comfortable with spending.

Comparing Smaller and Larger Home Down Payments

Generally, a larger down payment is regarded as much more beneficial. A lower down payment is often seen as a bigger risk for lenders. Here are some of the advantages of having a larger down payment ready for your purchase:

• Better mortgage interest rate
• More equity in your home from the start
• Lower upfront and ongoing costs
• Lower monthly mortgage payment

If you are utilizing a government-backed mortgage, there is less of a risk since a portion of these loans is guaranteed. However, buyers will have to pay for these guarantees which vary from program to program. Also, be aware that conventional mortgages typically require homebuyers to pay for private mortgage insurance if they put less than 20% down. There is a trade-off between your down payment and credit rating. Larger down payments can help offset a lower credit score while higher credit scores can usually help offset a lower down payment.

While larger down payments can provide many advantages, there are certain circumstances where it is not the ideal option:

• Do not drain your emergency savings to increase your down payment. If you do not have savings, this leaves you vulnerable to financial emergencies in all aspects of your life. It is always important to prioritize emergency savings.
• Make sure you have a good grasp of the housing market. Taking several years to save up for a large down payment could hurt you in the long run. While you are saving for this payment, housing prices generally are going up. Working with an agent (link to real estate agent blog) can help you make the most informed decision regarding the timing of your purchase. For instance, if housing prices and mortgage rates are historically low, this could be a great tradeoff for having a smaller down payment.
• If you have high-interest debt, like credit cards, it is best to put your savings towards these payments rather than a higher down payment. This will help you save money by paying less in interest and helping reduce your debt before setting aside your down payment.

Where Can I Source My Down Payment?

There are a multitude of options available for coming up with your down payment. If this is not your first home purchase, repeat buyers that have positive equity in their current home can use the proceeds from selling that property to help with the down payment on their next property. Here are other sources for your down payment.

• Savings
• Selling significant assets like cars or collectibles
• Gifts from loved ones
• Borrowing against a 401k
• Down payment assistance programs from government agencies, employers, and nonprofit organizations

How Much Should I Put Down on a House?

The right down payment amount depends on your specific financial situation as well as your goals. While a larger down payment will guarantee lower monthly mortgage payments, you’ll need to consider your emergency savings and if you will have enough money to proceed with your other responsibilities.

In order to help you determine the right mortgage amount for you, utilize these following tools:

• Create a working budget to better understand how much you should have in your emergency savings and what feasible amount you can set aside for your down payment.
• Use our down payment calculator to determine how your down payment total affects your monthly mortgage amount.
• Always prioritize emergency savings since you never know what can happen. Do not use all your savings for your down payment since this can set you up for failure.
• Shop around and do your research to compare mortgage rates and different programs you may be eligible for.
 

In Conclusion

Remember, determining the right down payment, the right rate and the right mortgage program is the foundation to having a successful mortgage experience.