Buying a home often requires years of saving for a down payment, which is money that a buyer pays upfront toward the cost of a house. This is the immediate equity that a buyer has when purchasing a home. Unless buying with cash funds, the rest of the money comes from a loan. Different lenders require different amounts of money down based on a variety of factors. Lenders refer to a down payment in terms of a percentage of the purchase price.
Private lenders typically prefer that buyers put down 20 percent. Some will accept lower down payments, but those borrowers are considered a higher risk. Lenders want a guarantee and require borrowers with lower down payments to pay for mortgage insurance. This is a policy that pays the lender if the borrower defaults on the loan and the house winds up in foreclosure.
The cost of mortgage insurance depends on the size of the down payment and loan, as well as the borrowers credit score. Mortgage insurance tends to be expensive, which is why many people decide to put off buying a house until they can save enough money to put down 20 percent. If you put down 20 percent, you will have a better chance of being approved by a private lender, and you will also generally qualify for a lower interest rate, fees and monthly payments.
The Federal Housing Administration (FHA) allows borrowers to obtain mortgages with as little as 3.5 percent down. FHA guarantees a portion of the amount borrowed and offers loans at lower rates than private lenders. FHA charges less for down payments of 5 percent or more and does not base its fees on the borrowers credit score.
Fannie Mae and Freddie Mac are government-sponsored companies that make money available for lenders to provide to borrowers. The programs are designed for people with low- and moderate-incomes. These mortgages require as little as 3 percent down. The Department of Veterans Affairs (VA) offers loans with zero percent down for active-duty military members and veterans. The Department of Agriculture also offers loans with no down payment to encourage home purchases in specific rural areas. Borrowers that obtain loans from private lenders guaranteed by the government are required to pay for guarantee fees, but not mortgage insurance.
Finding the Down Payment That is Right for You
The amount you should put down on a house depends on your specific financial situation, including your income, savings and credit score. It also depends on the price of the house you want and whether you want to buy immediately or can afford to wait. Putting down more can significantly lower your monthly payments. You need to make sure you do not use up all of your savings because you will still need to buy furniture and have money set aside for any necessary repairs. You should also consider the fees and closing costs. Compare lenders and weigh your options carefully to make the right choice.
Published with permission from RISMedia.