What You Need to Know About Making a Down Payment on a Home
A down payment on a home is money given to a mortgage or other lending company by someone wanting to purchase a Buda home. The purpose of a down payment is to reduce the amount borrowed by the home buyer from the lending company and to potentially decrease monthly mortgage payments. Down payments are always expressed as a percentage of what needs to be borrowed to buy a home.
Down Payments Explained
For example, if a couple wants to buy a home costing $100,000 and they have $3000 available to use as down payment, they will need to borrow $97,000 from a mortgage company, bank or other lending institution. First-time home buyers should be aware that down payments made to mortgage companies could be lost if buyers are forced into foreclosure due to not making monthly house payments. Lenders consider down payments as an incentive for home owners to make timely mortgage payments.
Why a 20 Percent Down Payment is Recommended by Real Estate Experts
The best reason for home buyers to put down 20 percent is that it can significantly improve their chance of obtaining a mortgage loan. In addition, the Consumer Financial Protection Bureau has established renewed qualified mortgage rules stating that home buyers must meet a debt-to-income ratio of 43 percent. This means a home buyer's debt must be no more than $43 per every one hundred dollars the buyer earns every month.
Common Down Payment Options
A down payment is usually the single biggest hurdle when it comes to turning a buyer's dream into reality. The expense can be enough to make anyone hit the Pause button on their search. But there may be more options for a buyer than they realize when it comes to affording the down payment. See how different loans have different terms and minimums and how buyers can use this to their advantage.
In a Perfect World
A 20% down payment is a minimum that was established for practically as long as modern banks have been in existence. It remains the number the buyer should strive to hit if they're hoping to save money in the long-term. With a 20% down payment, buyers don't have to to pay for private mortgage insurance (PMI.) PMI is a type of insurance a lender takes out in case the buyer defaults, but the costs of the insurance are passed down to the buyer. But as you might imagine, 20% is a lot to ask for in modern times. According to some studies, about 40% of homeowners aren't able to come up with even 10% of their down payment.
Common Mortgages and Their Minimums
The exact minimum of a down payment depends on the type of loan a buyer chooses. For members of the military or for spouses who lost their partner while in the service, they can receive a VA loan without having to put down a single penny on the property. For approved buyers on a conventional loan, they may be able to put down only 3% on a standard loan (plus the costs of PMI.) There are other government-secured loans available for those who can't afford 20%. An FHA loan, for example, has a requirement of 3.5% for the down payment, while a USDA loan requires no down payment at all.
Things to Consider
While it may seem smarter to opt for mortgages with low or no minimum down payment options, Driftwood buyers will need to consider the additional costs of putting down less than 20%. Lenders will tack on fees wherever they can to mitigate the potential of a default on the loan. If going for a government-backed loan, buyers need to hit a number of requirements first. USDA loans, for example, are only available for properties in certain areas, while VA loans require fees (based on the down payment price) from buyers that put money back into the housing program. The bottom line is that a buyer is almost always better off trying to hit the 20% equity goal as soon as they possibly can.
As savings steadily decline and more buyers can't come up with a 20% down payment, it may alter how mortgages are structured in the future. But for now, buyers are encouraged to do their research when it comes to their lending options. Picking a lender is as important as picking a type of mortgage—perhaps even more important. No matter what type of mortgage a buyer chooses, it's the lender that ultimately lays down the specifics of each loan. Shopping around, asking questions, and comparing each scenario will help make it easier to decide the right down payment option.
How Much Down Payment Do I Need?
Many people think they need 20 percent down to buy a home, but it may not be necessary. Home buyers, particularly first time home buyers, could have several alternatives to making a large down payment. Gaining a better knowledge of typical down payment arrangements will help borrowers to make the right choice for them.
Understanding the 20 Percent Down Payment Myth
Lenders offering traditional mortgage loans might cite 20 percent as a standard down payment, but there is a little nuance to this assessment. Putting down a 20 percent payment to get into a house has been a typical preference of lenders for many decades. As such, lenders tend to give the best rates to people who can make such a down payment, and generally do not require private mortgage insurance (PMI) when the buyer has a 20 percent stake in the property.
However, this does not mean that buyers must have a 20 percent down payment to qualify for a mortgage. This belief has stymied many first time home buyers. In fact, several conventional and government-insured loan programs allow buyers to get a foot in the door with much less.
Common Low Down Payment Options
There are plenty of conventional loan programs that will accept buyers applying for a loan that is 95 percent loan-to-value (LTV), meaning a 5 percent down payment. Five percent down was the lowest option for a few years after the housing crisis, but then lenders began to relax their requirements a little. At present, Fannie Mae and Freddie Mac will both buy certain mortgages from lenders if the borrowers make a 3 percent down payment. The Federal Housing Administration (FHA) has an 3.5 percent down payment option for its FHA-insured loans, which also feature lower requirements for income and credit.
Mortgages With No Down Payment Required
Most lenders want to offer conventional loans that conform to Fannie Mae and Freddie Mac's guidelines, but they may be willing to step outside those standards in some cases. Some lenders will consider lending to a borrower with no down payment or a down payment lower than the 3 percent standard for conforming loans. These loans may be dependent on a home buyer's income, credit, or the area in which they want to buy.
For borrowers who meet very specific requirements, the U.S. Department of Agriculture (USDA) and the Department of Veterans Affairs (VA) feature loan programs with no down payment. These loans may come with higher origination fees or other costs, which still may be lower than a 3 percent minimum down payment.
Low Down Payment Trade-offs
Of course, there are a few concessions that buyers may have to make in exchange for the lowest possible down payment. The best interest rates typically go to people with high credit ratings and a larger down payment. When borrowers only put a few thousand dollars down (or none at all), they will take longer to accrue equity in the home.
This means that they may have to wait a few years longer before they could sell the home at a profit, if home values do not rise significantly in the area. In many instances, mortgage loans at less than an 80 percent LTV must have PMI. Lenders can pay the cost of PMI or pass it on to the borrower. Kyle TX home buyers should carefully evaluate the benefits and risks of keeping more cash on-hand, if they have it in the first place, before they commit to one path or another.
Sources of Down Payment Funds
Fortunately, borrowers have a few options to come up with the down payment. Some lenders may insist that the down payment come entirely from personal funds, but many do not. As a result, people may be able to get part of the down payment from the following sources:
- personal savings
- withdrawal from an independent retirement account (IRA), with some stipulations
- gifts from friends and family
The one source that many lenders do not prefer is another loan. They do not want borrowers to get into more debt just to be able to secure a mortgage, since buying a home is such a large expense on its own. This is why lenders often ask borrowers to provide proof in writing that a gift from relatives is an actual gift, and not a loan.
Buying a home may be one of the most expensive things people will do, and the down payment could be the most costly aspect. With these low down payment options, buyers have some flexibility in determining how much they have to pay before they can get a mortgage loan.