How much is too much for your down payment?
It’s no secret, accumulating a down payment is the biggest obstacle many first-time home buyers face. Between rising rents, higher home prices, and the pervasive myth that you need to put down at least 20% to buy a home, determining how much you need to save for a down payment varies. A larger down payment will usually reduce or eliminate the cost of mortgage insurance, and may lower the monthly mortgage payment, but you don’t need to put everything you have saved toward your down payment. Buying a new home will have costs associated with it like urgent upgrades, home maintenance, and the closing costs on your mortgage.
Before you commit to a number for your down payment, talk with a mortgage professional. What you actually need to put down versus what you think you need to put down, may vary substantially.
Down Payment Assistance
When you apply for mortgage financing, talk with your loan officer about down payment assistance. There are over 2,500 down payment assistance programs available nationwide, and many of them are designed specifically for first-time home buyers. Down payment assistance comes in the form of grants, low interest loans, or tax credits. Free indexes like DownPaymentResource.com are available so you can browse different programs.
Low Down Payment Loan Programs
Your mortgage should not be one-size-fits-all. That’s why there are so many different types of mortgage loans. Government-sponsored loans like the USDA Loan and VA Loan are available to qualifying borrowers with 0% down. The FHA Loan is available with down payments as low as 3.5%, depending on the borrower’s credit. Today, many conventional loan programs are available with down payments as low as 3%. I would be happy to help you explore your options. I’m the mortgage expert so you don’t have to be!
Every mortgage loan origination comes with closing costs, whether it’s a new purchase or refinance. Expect your closing costs to range from 2% to 5% of the purchase price. There are grants available to cover closing costs, and in some competitive markets the seller or builder may offer to pay the closing costs.
Expect the Unexpected
Your home inspection report should make you aware of any potential repair issues that you may need to fund through the first few years of homeownership. Allocating some of your savings to an “emergency fund” will help you prepare for these projects. Just like you set aside cash to cover a car breakdown, your emergency house fund can cover immediate emergencies like plumbing or HVAC issues. If you are buying a home that you know will need significant work, consider using the repair estimates as a point of negotiation with the seller. If they are aware of issues, and are unwilling to complete the repair themselves, they may be willing to negotiate the price of the home.
If you can comfortably put 20% down on your home and still set aside cash reserves for closing costs, home maintenance, and an emergency savings, that may be the way to go. If a 20% down payment would stretch your savings too thin, we can talk about your other options when you get preapproved for financing.