Coming up with enough cash to put down for a house is one of the biggest barriers for most hopeful home buyers. But how much do you really need?
What’s a Down Payment?
A down payment is the cash you pay upfront to get a home loan. It is taken from the total amount of your mortgage and represents the beginning equity, or your ownership stake — in a house and property.
Benefits of Putting Down 20%
Lenders like to see 20% down, this shows them that there’s less risk in giving you a loan. The more you put down, the better mortgage interest rate you’re eligible to receive. There are other benefits as well:
But remember, the down payment isn’t the only money you’ll be paying up front. Keep in mind that you’ll be paying things like closing costs and earnest money deposit.
Is 20% My Only Option?
You don’t have to put down 20%, you can actually buy a home with as little as 3% down. FHA loan rates are some of the lowest you can find. The Federal Housing Administration is a government agency that helps home buyers — especially first time home buyers — get approved for a loan. To achieve this, the FHA helps mortgage lenders by providing a portion of the loan balance.
Fannie Mae and Freddie Mac also have low down payment programs, some large commercial lenders offer low down payments. Some programs even offer 0% down as an incentive to grow loan demand.
If you’re a service member, you also have access to 0% down programs through the Department of Veteran Affairs. Ask a lender about your down payment options when shopping for a loan.
How Do you Know Which Option is Right for You?
It may seem like an easy decision depending on the amount of money you have to put down, but there are some factors with each option.
Even though you could put down 0-3%, putting down a lower amount of money makes you a bigger risk in the eyes of a lender. The government programs may help with the missing portion but you will end up paying for that portion. Built into your monthly payment will be something called mortgage insurance that ensures that you’re paying back the lender. Some programs won’t require it but it may come in the form of a “guarantee fee”. Paying a lower down payment also puts you at risk of paying a higher interest rate over the life of the loan.
0-3% down can be tempting, but the key to building your net worth is to buy smart especially when it comes to a big purchase such as a house.
How Can you Start Saving?
Saving for a down payment doesn’t need to be difficult. If you’re goal is to buy a home in 12-14 months, have a plan. Think about where you could spend less and be a little more frugal, maybe that’s cutting out lattes and avocado toast! Figure out what kind of home you’re looking for, how much 20% will cost and shoot for that number.
Talk to a lender when you’re shopping for loans and find out what your options are. Lenders will disclose any fees that may come up. Saving for a down payment can seem intimidating, but with a plan of action and some research, saving for a down payment becomes simple.