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Home Down Payments: How Much Do You Need?

Home down payment

Home down payments are often what stands in the way of a person buying a house. You might have great credit, but you don’t have much in the way of savings. There might be a recommended down payment amount, and putting more down can mean that you get a better interest rate and have to pay less in the long run, but many lenders are willing to work with borrowers who aren’t able to pay a lot upfront. The different options for home down payments can open up the home buying process to more people and can make getting a home of your own within your grasp.

20 Percent

There are several reasons why a 20 percent down payment is often considered the gold standard in the mortgage world. When you put 20 percent of the home’s value down up front, you borrow less, which means your debt to income ratio is lower, and that you’ll need to pay less each month. Saving up a full 20 percent of a home’s value also signals to the lender that you are responsible since you were able to save a considerable sum of money. For that reason, a lender is likely to give you a lower interest rate when you put down 20 percent or more. Another benefit of putting 20 percent down is that you automatically have a 20 percent stake in the value of your home.

3.5 Percent and Up

A down payment of 20 percent might be ideal, but is far from your only option when you are buying a home. Some lenders will let you put down a smaller amount, anywhere from 3.5 percent to around 15 percent. In exchange, you’ll need to purchase private mortgage insurance and might need to pay a higher interest rate. You’ll pay more for the house in the long run, thanks to the mortgage insurance and increased interest rate, but won’t have to worry about saving up a hefty sum upfront. Putting less than 20 percent down can work to your advantage if home prices are currently low or if the mortgage rates available are still relatively low, even if you do need to pay an extra percent or so.

You can get a conventional mortgage from a private lender if you put down 5, 10, or 15 percent upfront. If you’re going to put just 3.5 percent down, you’ll need to apply for a Federal Housing Administration (FHA) loan. The FHA guarantees loans under its program, meaning that the lender faces less risk if you default. You still need to pay for mortgage insurance with an FHA loan, at least until you’ve paid off at least 20 percent of the home’s value.

Less Than 3 Percent

Several programs exist that make it possible to put down nothing or practically nothing up front. At the end of 2014, Fannie Mae announced a 97 percent loan to value ratio mortgage for first-time buyers, meaning that people could put just 3 percent down. Other programs exist that let certain buyers make no down payment and still qualify for a mortgage. Loans guaranteed by Veterans Affairs (VA) require no down payment, as do loans made as part of the USDA’s Rural Development program.

While you might be able to make a small down payment on a home, if you have enough savings, putting more down might be better in the long run. Our pre-purchase counseling can help you better understand your mortgage and down payment options and help you choose the best option for you.

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