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Down payments for your home: everything you need to know



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Get ready to put some cash down!

Sarah Tew / CNET

You are about to embark on the exciting journey of becoming a home owner. But before you start house hunting, you need to prepare a budget, which starts with securing financing and calculating your down payment amount.

The good news is with rates at historical lowsIt’s a great time to buy a mortgage and buy a home.

The deposit is the amount you pay in advance, your so-called skin in the homebuying game. Here’s what you need to know to find out the right down payment amount for you.

Why do you need a deposit?

Most lenders require you to make a significant upfront payment as part of securing a mortgage. Depending on your income and credit history, as well as the type of mortgage and a lender’s specific requirements, you can expect a down payment of between 3% and 20% of the purchase price.

The bottom line: The more you put out, the less you need to borrow – which can help you get a lower interest rate and lower your overall loan costs.

Deposit Requirements

The details of a down payment depend on a range of factors, including the specifics of your financial background and any special requirements of your lender. That said, each type of mortgage has its own rules.

Conventional Mortgages: With conventional mortgages, your lender determines your down payment. Usually you can make a down payment as low as 3% to 5%. If you don’t make a 20% down payment on conventional mortgages, you have private mortgage insurance. Lenders can add the PMI to your monthly premium.

FHA loansYour down payment for an FHA loan depends on your credit score. You can get a down payment of as little as 3.5% if your score is higher than 580. If not, your down payment will be 10%.

VA loans: VA loans are for military personnel and veterans, provided they meet the criteria. You can view all eligibility criteria on the Department of Veteran Affairs website. If you do qualify for a VA mortgage, you do not need to make a down payment.

USDA loans: With USDA loans, you don’t need to make a down payment. However, you must meet the eligibility requirements to be eligible.

Fannie Mae Home Ready: With Fannie Mae you can get a down payment of only 3%. The HomeReady program is suitable for lower-income people who have a credit score of at least 620, but if you have a score above 680, you can receive better rates.

Freddie Mac Home possibly: The program gives homeowners the chance to qualify for a down payment of just 3%. It’s perfect for first-time homebuyers, seniors, or those looking to upgrade to larger homes.

Advantages of a large deposit

A larger down payment can give you more equity right from the start. Think of it this way: If the purchase price is $ 200,000 and you make a down payment of $ 40,000, your mortgage is only $ 160,000, giving you up to 20% equity right away. It helps you avoid private mortgage insurance and lowers your monthly payment compared to making a smaller down payment. It will also save you money in the long run because you don’t have to pay interest on that $ 40,000.

Here’s an illustration of what your payments look like when you make a 3.5% down payment versus a 20% down payment on a 30-year fixed rate mortgage:

Types of deposits, compared

Purchase price

Deposit amount

Percent down

Interest

Monthly principal and interest

Total monthly payment including insurance and tax

$ 200,000

$ 7,000

3.50%

3%

$ 813

$ 1,281

$ 200,000

$ 40,000

20%

3%

$ 674

$ 1142

While the $ 139 difference may seem negligible at first glance, keep in mind that you’ll save more than $ 100 a month for 30 years. That, in turn, represents savings of up to $ 50,040, making the initial 20% investment worth it.

How much of a down payment do you need to make?

While your lender sets requirements for what you have to pay to get mortgage approval, you can specify more if you want. It’s essential to make a budget in advance to make sure the down payment you want to make doesn’t interfere with your other financial goals.

You can also use a mortgage payment calculator to determine different down payment amounts and how they affect your monthly payment. Using this tool, you can determine the right size for your financial needs.

How to Save for a Down Payment

“Saving for a down payment is really about creating and following a plan,” said Jason Gelios of Michigan, the author of Think Like a Realtor.

“Achieving your target savings can be as easy as getting a side gig, asking for a gift from your family (provided the loan allows it), cutting unnecessary items from your daily or monthly expenses, and finding additional ways to increase your income, ”he says.

Other sources you could use to fund your down payment include the sale of assets such as cars, valuable artwork, or jewelry. You can also borrow money from your retirement account – if your broker allows it. However, if you do not pay back the loan within the time limit, you could face high tax liabilities.

When you are ready to make a deposit, you will need to prove how you received it. Mortgage lender Dan Green, whose Homebuyer business caters to startups, recommends “keeping a good paper trail as mortgage lenders investigate bank deposits for fraud and money laundering. Deposits they cannot verify will not be able to file an application. to serve when buying a home. “

Deposit support programs are also available to assist homebuyers, although you must meet income, living and other requirements to be eligible.

Pitfalls to avoid

Meanwhile, there are also methods you will want to avoid when putting together a down payment. For starters, you don’t want to empty your savings account to make the down payment. First, it doesn’t leave you anything in reserve: if a surprise expense turns up, you may have to put it on the bill.

And two, other costs come from home ownership. You have costs for closing, appraisal of homes and costs related to moving and furnishing your new home. That’s why it’s imperative to strike the right balance between making a healthy down payment and leaving enough in the bank to account for other expenses.

Another thing to avoid is using high interest debt to fund your down payment. Taking out a mortgage is a huge financial undertaking in itself, but adding high interest debt doesn’t give you that much financial leeway. In addition, because the debt is high interest, it takes longer to repay the loan – at a much higher cost.

Why do mortgage lenders ask for a down payment?

“The point of a down payment is that it gives the borrower some skin in the game and allows the lender to get their money back if the borrower doesn’t pay,” said Matt Frankel, a CFP and mortgage analyst. with The Ascent. “A buyer who has just paid $ 50,000 out of pocket to buy a home is more likely to try to avoid foreclosure than someone who has paid nothing at all.”

While the down payment is a critical part of the process, there are generally other factors to consider as part of the big picture. Green suggests, “Spend less time planning a down payment and more time planning a monthly budget. The down payment is a one-time occurrence. The mortgage payment is underway.”


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