How Much of a Down Payment Do I Need?
all about down payments
What is a Down Payment?
A down payment is a payment that you have to put down up front when purchasing an expensive good or service. A new house qualifies as an expensive good or service and therefore often requires a down payment up front to secure the good (the house) you are purchasing.
In some cases, these down payments are nonrefundable, even if the deal falls through. Moreover, the person making the purchase will have to get a loan (called a mortgage when purchasing a home) to cover the rest of the cost of the home at the time which they are purchasing it.
How Much of a Down Payment is Required for a Home?
A down payment on a home will usually range between the 3.5 and 20% range. However, the "standard" down payment one will put down when purchasing a house will be about 10-20% of the total cost of purchasing the home. Lower down payments can be accepted under certain circumstances, however, the person purchasing the home must qualify for the lower down payments.
FHA Loans Accept Lower Down Payments
The Federal Housing Administration (FHA) has mortgage loan programs that are available to people who have a credit score of at least a 580 or higher will be able to get a house with a 3.5% down payment. Those who have a 500-579 credit score will be able to get a house with only a 10% down payment. The lower your credit score the higher the interest rate you will pay for the same loan as someone with a higher credit score.
Putting 20% down on a home is standard and is considered "ideal" if at all possible.
"Why 20%?" many people ask.
The reason is that 20% down on the home provides quite a few benefits for the buyer, including the following:
- Putting down at least 20% allows you to pay private mortgage insurance (PMI).
- A 20% down payment can help you get lower interest rates than if you have a lower percent ready for a down payment on the home. This can literally save you $1,000s over the life of a loan.
- A larger down payment in the 20% range will also help you be more competitive when there is more than one offer on the table.
For these reasons, a 20% down payment is the ideal for these aforementioned reasons.
What Happens If I Have Less Than 20% Down Payment?
For those who can't afford the full 20% down payment, there are plenty of other options available. The aforementioned FHA loans are a great option for those who are looking for a 3.5% to 10% down payment option on their home.
However, it is worth noting for those who do not have a full 20% down payment, they will often spend more money on the interest over the life of their loan as they are borrowing more money in the mortgage and putting less down up front. The interest is charged on the entire loan that is taken out, which will result in more money being paid towards interest over the life of the loan.
The Difference Between 10% and 20%
For example, let's say someone is buying a $200,000 home. If they were to put 10% down on that, that is $20,000 leaving them to borrow $180,000. However, if those same buyers were to put down the recommended 20% down payment on a home, they are now putting $40,000 down on the home and borrowing $160,000. If this loan was taken out at a 4% interest rate, they are saving the interest on $20,000 of the worth of that property over the standard lifetime of the loan, which is usually anywhere between 15 and 30 years on the standard mortgage.
That 10% difference is what can help the buyer literally save $1,000s over the life of the entire loan. It may not add up to that much of a difference in your monthly mortgage payment, but adding up the cost over 15 to 30 years worth of payments, it sure will make a difference in the amount you pay towards interest versus the amount that is put down on the principal of the loan itself.
What Else Do I Have to Do to Qualify for a Mortgage?
Besides saving your 3.5% to 20% down payment for a new home, you may be asking yourself what else you have to do to qualify for a mortgage to purchase a home?
The following are some of the other criteria that you will have fulfilled in addition to having an adequate down payment before you will be pre-approved to begin looking for and getting ready to purchase your new home:
- Proof of consistent employment along with a consistent monthly income to show that you will be able to afford to make payments on your new home.
- Proof of how much money you are making on a monthly basis that can allow you to pay the mortgage on the home you are purchasing.
- A total view of your entire income versus how much debt you are currently obligated to pay to make sure the loan you are looking at is affordable along with all of your other current expenses.
- Your credit score from the past several years to see if you are a good "risk" to loan money to for a mortgage (your credit score will directly impact the interest you have to pay on your new home).
- How much cash you can put down (that down payment we were talking about).
- How much you can afford on a house (based on that down payment we were already talking about).
If you are able to prove that you can fulfill these aforementioned criteria, your likelihood of being pre-approved for a mortgage is quite good. Once pre-approved, you can begin looking at houses in your price range.
KEEP IN MIND
Pre-approval is no guarantee you will be able to get a mortgage for the home you want to put a down payment on to purchase. However, the chances are quite good that if you were preapproved for a mortgage, that company will be willing to provide you a loan to buy that home. That's only after they get your down payment, of course!
The Bellwether Community Credit Union is a great place to start financing your downpayment for a new home. Please feel free to contact us any time and we will be happy to meet with you to start getting your down payment ready for your new home.
Return to "Blog"