Conventional Home Loan Down Payment – One of the hardest parts of buying a home for the first time is the down payment. You may have heard that in order to buy, you need to have 20 percent of the total cost of the house saved for a down payment. In fact, you can choose how much to put in based on what works best for your situation.
Putting 20 percent has many advantages. However, saving enough money for a 20 percent down payment can be a challenge, especially for first-time home buyers.
Conventional Home Loan Down Payment
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And the money you put into your home isn’t available for other things, like emergency expenses or other savings goals. There are a number of mortgage options that allow you to make a down payment of less than 20 percent, but loans with lower down payments tend to cost more. In general, the less money you invest, the more money you pay in interest and fees over the life of the loan.
According to the National Association of Realtors, the median home price nationwide for the year ending June 2016 was $227,700. 20 percent down on this home with an average price of $45,540; a 10 percent down payment would be $22,700; a 5 percent down payment would be $11,385; and a 3.5 percent down payment would be $7,960.
In this blog, we’ll show you how your down payment affects your mortgage costs, so you can choose the down payment that’s right for you.
If you want to buy a home but can’t afford a 20 percent down payment, you’ll likely need to pay for mortgage insurance. Mortgage insurance protects the lender if you fall behind on your payments.
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1. You’ll have smaller credit—which means lower monthly payments. With a larger down payment, you borrow less, so you have less to pay. This means that your monthly payments will be lower than with a smaller down payment.
2. You will have lower overhead costs. When you borrow less, you pay less interest on the loan. This is because the interest is calculated on the lower loan amount. When you put down at least 20 percent, you also typically don’t have to pay mortgage insurance. Mortgage insurance increases your monthly mortgage payment.
3. You start with more equity, which protects you if the value of your home falls. When you pay a larger down payment, you have more reserves in case house prices fall. With a smaller down payment, you have a higher risk of owing more than your home is worth if home prices fall, as they did between 2008 and 2012. If you owe more than your home is worth, it can be very difficult to sell or refinance your home. home.
The “20 percent” limit is based on guidelines set by Fannie Mae and Freddie Mac, the government-sponsored companies that guarantee most mortgages made in the United States. To qualify for a Fannie Mae or Freddie Mac guarantee, a borrower must put down at least 20 percent or pay mortgage insurance. That’s because mortgages with less than a 20 percent down payment are considered riskier for the lender.
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Not all mortgages are guaranteed by Fannie Mae or Freddie Mac. Low down payment mortgages are offered through other government guarantee programs, such as the Federal Housing Administration (FHA), the United States Department of Agriculture (USDA), and the Department of Veterans Affairs (VA). These programs also require mortgage insurance or other payments. Some lenders may offer their own low down payment mortgage programs that do not require mortgage insurance or participate in government guarantee programs. These loans typically charge higher interest rates to compensate for the lack of mortgage insurance and collateral.
No matter what type of loan you choose, if you put down less than 20 percent, you can expect to pay more for your mortgage than if you put down at least 20 percent.
Although a larger down payment has advantages, it is not uncommon for a down payment of less than 20 percent of the purchase price. There are a number of different loan options that allow for a low down payment.
There are two main steps to making a decision about how much to invest. First, assess how much money you can afford for a down payment. Second, research your loan options with lenders so you can understand how your down payment option affects your overall costs.
Mortgage Loan Options
The first step is to determine how much money you have available for initial home expenses. If you haven’t already, collect your most recent savings and investment statements to start with an accurate number. As you decide how much you can spend, make sure you have enough money left over for emergency savings, other savings goals, and closing costs.
You may be tempted to reduce the largest down payment you can afford. However, it is important to have emergency savings and cash available to pay for unexpected expenses and critical home maintenance. A good goal is to build an emergency fund with at least three months of living expenses before moving in.
Putting money into your home means it’s not available for other expenses—that’s one reason you need a separate emergency fund. Once you get money into your home, it’s not easy to get it out again. If you need money for another major expense, such as paying for college or medical expenses, you may find that there is no way to access that money. Home equity loans or lines of credit allow homeowners to borrow against their equity, but you generally need to have significant equity to qualify.
Keep in mind that you will also have to pay loan closing costs. Typically, these costs are paid up front using the same savings you use for the down payment. For example, let’s say you’re hoping to buy a $200,000 home and you’ve determined that, after accounting for other savings goals, you have $30,000 available for down payment. Assume your closing costs are approximately $10,000 (actual amount may be approximate). This means that the amount you have available for a down payment is actually only $20,000 or 10 percent of the home’s price.
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Learn more about what to consider when deciding how much to invest. For personalized advice, consider meeting with a HUD-approved housing counseling agency.
Choosing the right down payment amount for you is unique to your financial goals and personal situation. Knowing how your down payment affects your mortgage options and how much you’ll pay for your mortgage puts you in control of finding the best loan for you.
Talk to several lenders and ask them to show you different loan options for different down payment levels. Ask what they recommend and why. But you don’t have to decide on a specific lender just yet.
If you’re just starting to save or decide you want to save more before you buy, we’ve got some tips to help you save on your down payment. Research shows that the best way to achieve your goals is to make a clear plan and then make it as easy as possible for yourself to follow that plan.
How Much Should I Put Down On A House?
If you don’t already have a lot of savings, it may take some time to save enough for a down payment. Here are two ways to create a down payment, depending on your situation:
As with most aspects of home buying and mortgage shopping, a down payment that is good for someone else may not be the right choice for you. Take the time to research your options and compare costs to make the best choice for your financial situation. Jumbo mortgages and conventional mortgages are two types of financing that borrowers use to purchase homes. Both loans require homeowners to meet certain eligibility requirements, including minimum credit scores, income limits, ability to repay and down payment.
Both are also mortgages issued and guaranteed by private sector lenders, as opposed to government agencies such as the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), or the USDA Rural Housing Service (RHS).
Although they may serve the same purpose – securing property – these two mortgage products have several key differences. Jumbo mortgages are used to purchase high-priced properties—often in the millions of dollars. Conventional mortgages, on the other hand, are more or less in line with the needs of the average home buyer. They can also be purchased from a government-sponsored enterprise (GSE) such as Fannie Mae or Freddie Mac.
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Jumbo mortgages are loans intended to finance expensive real estate, as the name suggests. For the most part, they involve large sums: at least around $650,000, and often running into the millions. Luxury homes and those located in highly competitive real estate markets are generally financed through large mortgages.
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