When purchasing a home, you will typically make a down payment. This may sound daunting, but HomeHunt will walk you through the process. Here is everything you need to know regarding down payments, minimum requirements for different mortgages, and what you’ll need to plan for in the future.
A 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.
There are very few mortgage programs that do not require a down payment. This is because a down payment helps reduce risks for lenders in the following ways:
You might have 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 following mortgage types:
It is important to note that down payment requirements can also vary by lender and are dependent on your credit history. For example, an FHA loan requires only 3.5% down for home buyers 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.
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:
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 by program. Also, be aware that conventional mortgages typically require home buyers 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 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:
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:
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.
To help you determine the right mortgage amount, utilize the following tools:
Remember, determining the right down payment, the right rate, and the right mortgage program is the foundation to having a successful mortgage experience. Contact HomeHunt today to get started with your home loan.