Down Payment: How Much Do You Need to Buy a Home?
As you look through available home listings in your area, you may be wondering what it would take to buy a home.
Most Americans purchase real estate through mortgages. It is a faster process than working to accumulate the total value of the home to buy it outright. However, mortgages come with interest rates and fees.
To keep your costs as low as possible, you'll want to make key decisions about the amount of the loan you take out. Specifically, consider the down payment.
What Is a Down Payment?
To buy a home, you need to show the lender some level of commitment in the purchase. While it is still possible to find a zero down payment mortgage loan, such as a VA loan, but this isn't typically the best option for today's home buyer. Rather, you'll want to make a down payment. This is the amount of cash you will pay out of your pocket to purchase the home. It is not a component of your mortgage and it should not be borrowed funds. It pays down a portion of the home and allows you to mortgage the rest.
For example, if you decide to purchase a home that is selling for $250,000, a down payment of $50,000 may be applicable. The remaining $200,000 plus fees are then paid to the home seller through the proceeds from the mortgage.
How Much of a Down Payment Is Best?
There is one rule to remember here. The more money you put down on the home, the less expensive the home will be for you over time. That's because there is less mortgaged and that means less interest you pay overall. So, the more that you can put down the better.
Most lenders require a down payment. If you are getting a conventional mortgage, for example, the lender may require between 5 and 20 percent of the home's sale price to be paid in the form of a down payment. If you obtain an FHA loan, this number drops to about 3 percent. You can always pay more, just not less. For those obtaining a VA loan, there is no down payment requirement for those who qualify.
Private Mortgage Insurance
Minimum down payments are just that - the least amount you should put down. However, if you make a down payment that is under 20 percent of the home's sale price, you may be required to purchase private mortgage insurance (FHA insurance or private mortgage insurance). These will likely require premiums paid by you each month to secure the loan's value.
Qualifying for a Larger Purchase
Another reason to make a large down payment on a mortgage is because it can help you qualify for a higher-priced home. Let's say your lender approved you for a home loan up to $200,000, but the home you want is $225,000. You may be able to put down that extra $25,000 to make the bigger purchase -- as doing so will reduce your monthly debt to income ratio. It all comes down to how much you want to spend each month in mortgage payments, of course. The larger the loan, the more you'll pay monthly. Larger down payments reduce that amount.
What Is Right for You?
It is a good idea to speak to your real estate agent and home loan lender about down payment requirements when you want to buy a home. Keep in mind that home sellers like to know buyers have strong down payments, as it shows they are serious & financially secure.
Striking a balance between having enough in savings and making a large down payment can be tricky, but with careful planning, you will be able to buy the home you want. As a future buyer, be sure to consult with a mortgage professional well in advance.