Down payments can be a significant expense for a first-time home buyer, who might not be able to pay as much as someone who already owns a home. How much is really needed for a down payment? Are there alternatives for those who can't meet the traditional 20 percent down payment requirement? How much do requirements vary from lender to lender? With the answers to these questions, you will have a better idea as to how much you need to have for a down payment, and ways that you might be able to make it easier.
Why Are Down Payments Required?
Since a lot of people cannot afford to buy homes entirely in cash, it is perfectly reasonable to need a mortgage in order to finance a home. However, lenders often worry about borrowers who get the money with little to no personal investment in the purchase. A mortgage is a legally binding document with serious repercussions for breaching that contract. Lenders often find that someone who has personally invested a fair amount of their own money into the property in order to buy it will be more likely to make mortgage payments on time. That initial investment is known as the down payment.
What Is the Standard Down Payment?
There are multiple varying opinions on what qualifies as a "standard" down payment. The truth is that lenders can set their own requirements. More than a decade ago, it may have been possible to find many lenders who were willing to open mortgages with no down payment at all. After the housing crisis, however, lenders tightened their lending standards. These days, expect lenders to request a down payment of 10-20 percent of the loan’s value, with a handful of exceptions. This payment does not include closing costs, discount points, moving expenses or anything that has to be done to the home before you can move in.
Are There Options for First-Time Home Buyers?
Paying 10-20 percent down, in cash, can be a difficult prospect for first-time home buyers. People who already own a home can sell their current homes and use the profits from the sale to make a sizeable down payment on a new home. First-time home buyers must use other means. As a result, many lenders offer loan programs targeted primarily at first-time home buyers that require a much smaller down payment. Loans guaranteed by the Federal Housing Administration (FHA) may have down payments as low at 3.5 percent. Loans conforming to the standards of Fannie Mae and Freddie Mac could allow you to make a 3 percent down payment, if you qualify.
How Much Should I Put Down?
Although many people will say to put down as little as possible, it's important to weigh all the options. Keep in mind that any loan with a down payment of less than 20 percent will likely require private mortgage insurance (PMI), which is an additional expense that could add up to $100 or more to your monthly mortgage payment. However, a smaller down payment also frees up more funds for closing costs, moving expenses and improvements needed in the home in the first few years of ownership. Keeping at least a few thousand dollars available after you move in is a wise move, if you can manage it.
Making that first down payment is often one of the hardest parts of home ownership for a first-time home buyer. Sometimes, a low down payment is what's needed in order to buy a home at all. With these tips, it's possible to secure a lower down payment on a mortgage loan.
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