You’ve been saving up every extra nickel and dime, packing your lunch, staying in instead of hanging out with your friends—all so you can have enough money for a down payment on a new home.
So, exactly how much money do you need to save for your home? Let’s discuss below.
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The Magic Number
If you ask around, most of those in your social circle will probably advise you to save 20% for your down payment. It’s an easy number to target. For example, if you’re hoping to buy a $200,000 home, you’ll need to save $40,000.
But is 20% Really Necessary?
These days, you don’t really need a hefty 20% down payment to purchase a new home. Depending on the loan type, you may not even need a down payment at all.
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That said, most lenders do require at least a 3.5% to 5% down payment.
What If You’re Buying a New Home?
Whether the home you’re hoping to buy is new (or new to you) or not, you may still be able to qualify for a low down payment. You lender will decide the minimum down payment.
Minimum Down Payments for Each Loan Type
Minimum Down Payment for an FHA Loan
If you’re applying for a Federal Housing Administration (FHA) mortgage loan, you’ll need a minimum down payment of 3.5% of the home’s purchase price. Of course, you can put down much more than 3.5% if you’re so inclined.
There’s a big “but” in this low minimum down payment. You may not qualify for such a low down payment if you don’t meet certain requirements.
FHA loans are among the most accessible to those with lower credit ratings. You can qualify for a FHA loan with a credit score starting at 580. However, with a lower credit score, you may not enjoy a 3.5% low down payment.
Minimum Down Payment for Conventional Loans
If you’re pursuing a conventional loan (which is a loan that’s not guaranteed by the government), your minimum down payment could be as low as 5% to 10%.
The down payment depends on the purchase price of the home. If you’re applying for a loan of up to $417,000, you can put down a minimum down payment of 5%. However, for loans over that $417,000 threshold, your down payment minimum will jump to 10%. But, in many ways, that down payment is almost just as manageable as 20% of $200,000.
Minimum Down Payment for VA Loans
If you’re a veteran and can qualify for a VA mortgage loan, you may not need a down payment at all. As long as your loan amount is for $417,000 or less. However, there may be certain exceptions if you’re buying a home in a high cost county.
VA mortgage loans are backed by the U. S. Department of Veterans Affairs (VA).
However, you don’t have to be a veteran to qualify. If you’re active duty, you may still be able to qualify for this type of loan.
Minimum Down Payment for USDA Loans
Similar to VA loans, USDA loans do not typically require a down payment.
This loan type is available to those buying homes in rural areas with less than 35,000 people. There may also be an additional restriction on income with a USDA loan.
Here’s the Catch
If you’re hoping to qualify for a low down payment, you’ll probably need to secure your mortgage with insurance.
Here’s a brief look at what mortgage insurance is and how it works:
If you’re planning to make a down payment of less than 20%, you’ll need to get mortgage insurance too. Most lenders typically require this type of guarantee to protect themselves if you don’t make your mortgages on time.
Mortgage insurance is required for conventional, FHA, and USBA loans. A VA loan does not require mortgage insurance because it’s actually guaranteed by the Department of Veterans Affairs.
On the bright side, paying mortgage insurance often allows you to get approved quicker.
But if the thought of paying more for your home in the form of monthly mortgage insurance payments gives youhives, you can always increase to a 20% down payment.
Why You Should (or Shouldn’t) Offer a Low Down Payment
Now that you see that a 20% down payment is not mandatory for many loans, let’s talk about why you should consider offering less (or no) money down. And let’s talk about why it may not be a good idea for you.
First, the pros:
Less money upfront. This one is pretty obvious. Instead of taking years to save enough money to manage a 20% down payment, you may be able to qualify for half that amount or even less.
Be in your home sooner. Piggybacking off of the earlier pro, you won’t have to take a long time to save for a down payment, so you can start the home buying process now instead of years down the road.
Now, the cons:
Mortgage Insurance. Depending on the loan, you’ll have to guarantee your mortgage with insurance. It can be pricy, adding around .5% to the loan amount. This can equate to hundreds of dollars to your monthly mortgage payment.
Higher interest rates. While you may not pay upfront for your home, you may end up paying a lot more than you would in the form of a higher interest rate.
Less bang for your buck. Let’s say you’d like to pay $1,000 in a monthly mortgage and not a penny over it. If you pay more in a down payment, you’ll be able to afford a more expensive home than if you pay less or nothing in a down payment.
The good news is that you don’t need to spend a long time saving for a down payment. Loans such as FHA and USDA make it a lot easier for homebuyers to purchase their dream home now instead of later and for less money. Lower down payments make homeownership more accessible to all.
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