Home Loan -The Down Payment
When you are buying a home, you’re required to make a cash payment as part of the purchase price. That’s called the down payment.
The amount of cash that you put down is expressed as a percentage of the purchase price. For example, if you wanted to do a conventional loan (which requires a 5-20% down payment) “ the what is considered a standard” down payment of 20% down on a house that costs $500,000, you would put down $100,000 of your funds toward the purchase price of your home while the bank would finance the remainder.
Please note that your down payment is made in addition to your closing costs, which include title and escrow fees. In certain circumstances it is possible for homebuyers to finance those costs as well into the loan proceeds, but they’re an additional item to keep in mind when calculating your housing budget.
What Is Considered An Average Down Payment for Today’s Borrower?
The down payment parameters are set by the various credit boxes of the loans. Today there are many different loans to choose from. If you have not purchased a home in 3 years or this is your first home purchase the FHA allows for a minimum of 3.5% down.
Why then have i heard that the average down payment is 20%. Well, Its not. According to the National Association of Realtors (NAR) reports that most homebuyers don’t put 20% down. Instead, they put down between 6% and 7% down—this is a trend NAR has seen since 2018.
Of course, the markets and the banks credit boxes/requirements have changed dramatically in this post pandemic pre recessionary period at the end of 2022.
Today the average down payment for a first-time homebuyer is 7%. There are loan programs that allow lower down payments, as low as from 0% to 3.5%! These include the FHA Home loans, VA loans, first-time buyer programs and others. There is one catch with these loans. Loans under 20% require mortgage insurance. Adding mortgage insurance will add to your monthly payment. This might still be easier than coming up with more cash upfront and with owner occupied home loans there is no prepayment penalty so as soon as rates come down you can refinance.
Private mortgage insurance, or PMI, is the most common form or mortgage insurance and can cost between 0.5% and 2% of the mortgage annually. You can remove PMI insurance once your loan balance reaches 78% or 80% (depending on your lender’s terms) of the home’s original price.
How Do I Determine What Down Payment To Put Down When Buying A Home?
We know that the preference would be that you could pay cash but for most of us that is not a reality. A number of factors need to be considered prior to making a decision about how much of a down payment you should make. First and foremost is how much can you afford? Can you afford to put down 20% or more. Avoiding the PMI insurance will lower your monthly payment but decrease your cash reserves. Do you need money to fix up your new home or to purchase furniture. Lets look at this more closely.
By putting down a larger down payment somewhere in the neighborhood of 15% to 20% can make lenders feel more confident that you’re committed to buying the house. That’s because you’ve got some skin in the game. If you’re putting less down less of a down payment or if you are going with the minimum 3 or 3% down, it can be considered a riskier loan for them and, therefore, can come with a higher interest rate. Weigh this with renting vs building wealth and equity with owning..
In addition a larger down payment means that less money financed and a lower monthly payment. A lower down payment can be a good thing if you’re having trouble qualifying for your loan or if you’re looking at homes at the top of your price range.
Individuals with lower credit scores or higher debt-to-income ratios may also be required to make a larger down payment.
If you and your lender are comfortable with a certain size down payment, you don’t necessarily need to put more than that down. Doing so can lower your monthly payments, absolutely.
However, you should consider whether that money could be better spent elsewhere—for example, paying down credit card or other high-interest debt, socked away into an emergency fund, or earmarked for home improvements or repairs. And don’t forget about paying for closing costs and fees, including the home inspection.
Type of Mortgage
What type of mortgage that you choose will also impact how much money you put down, some loans have specific down payment requirements. VA Home loans for military active and veterans offer zero money down. Some government conventional loans go as low as 3% down, while FHA loans and loans for first time home buyer Maryland or other areas also can get as low as 3.5%. Jumbo loans will require a 10% down payment or more.
CambridgeHomeLoan.com Mortgage Calculator can help you view down payment scenarios based on different parameters. Our Loan Advisors are also happy to go through all of your loan scenarios based on your goals. Feel free to call and discuss today.
Down Payment Assistance
If having a down payment is what is stopping you from purchasing a home, fear not. Most states have down payment assistance. You are also permitted up to 6% of the loan amount in the form of a seller concession which you can ask for when negotiating your price. Another option is a gift from a family member.
Are you ready to get started? Contact us anytime with your down payment questions, concerns or comments.
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