There’s something satisfying about buying your first home. It’s the first place where you come home and say: “This is home and this is mine.” It’s a very powerful feeling.
There are many tips for first-time home buyers, but a down payment is one of the bigger things to think about.
There are many people that are still making monthly payments to a landlord for a cramped apartment that they don’t gain equity in. They spend enough on rent that it may make more sense to put those monthly payments toward a mortgage and have the place be theirs.
So what holds them back? Well, you have to save 20% for a down payment, right? Wrong.
House down payments are one case where following the conventional wisdom may not be so wise. Sure, there can be advantages to making a higher down payment, but if it’s the one thing that’s holding you back, it doesn’t need to be that way.
Reduce Your Down Payment
The days of having to bring a $40,000 check to close on a $200,000 house are gone. There are a variety of low down payment options available for prospective buyers to get into the house they’ve had their eye on for a while.
There are also a couple options available that let you put down as little as 3% on a primary residence. If you’re a first-time home buyer purchasing a HomePath property from Fannie Mae’s HomePath Ready Buyer program, you can get the same down payment with up to 3% closing cost assistance.
The minimum down payment for an FHA loan is 3.5%. This could be a good option for those who don’t qualify for one of the other conventional loan programs.
If you’re applying for a fixed-rate loan, the minimum down payment on a conventional option should be no more than 5% for a single-unit primary residence.
Your minimum down payment may be higher if you have an adjustable rate or multiple units. You’ll also have to put more down for a second home or investment property.
Before we move on, we should mention that if you’re an active duty military, retired veteran or a surviving spouse, you can get a VA loan without a down payment. VA loans are the only program that doesn’t require a down payment.
Advantages of Higher Down Payments
While a smaller down payment shouldn’t hold you back, there are advantages to a higher down payment if you can afford one.
One of the principal arguments for bringing more to the closing table is the ability to avoid paying for mortgage insurance.
If you can afford the 20% down payment on a conventional loan, you can avoid making those pesky insurance payments altogether. Otherwise, you can request that mortgage insurance be removed once you reach 20% equity in the home.
On an FHA loan, if you make a down payment of 10% or more, mortgage insurance premiums go away after 11 years. Otherwise, they stick around for the life of the loan.
If you can’t afford to put down quite that much money, you have another option on conventional loans. You could opt for the lender-paid mortgage insurance (LPMI) like PMI Advantage.
Another thing a higher down payment will help you with is getting a better rate. A higher down payment signifies to the lender and investor that you’re a lower risk and you can get better terms.
Down payments aren’t the only factor in your rate, but they’re an indicator to the investor and lender that you have some commitment to the property going in.
Now ithat we’ve brought some truth to the down payment equation, maybe you’re ready to take the leap and finally buy that first home. Let us know if you have any questions. We’re always here to help!
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