Most homebuyers and almost all first-time homebuyers, finance all or part of their purchase with a mortgage. In the heady years of the housing bubble, that meant asking the bank for the purchase price, which the borrower repaid in monthly instalments with interest. Today, the 100% mortgage is long gone. Almost all lenders require the borrower to put down a percentage of the sale price in cash. This can represent a massive out-of-pocket expense, especially for first-time buyers. Luckily, some low down payment mortgages are available.
Why Down Payments are a Big Deal
Mortgage underwriters are required by law to scrutinize your ability to repay your mortgage loan. Lenders don't want you to bite off more than you can chew and end up in a foreclosure a few years down the road. The more you borrow, the higher your monthly payment. Putting down a high amount, say 20 percent of the value of the home, reduces the risk that you will default on your mortgage payment. With so much of your cash invested, you are unlikely to stop making payments and risk losing the house. Plus, you must be very responsible with your budget to have saved that amount of money in the first place.
Your lender may reward your hard work by relaxing its credit criteria or giving you a lower interest rate. However, how much you need to put down will depend on the type of loan that you choose.
Minimum Down Payment for an FHA Loan
The Federal Housing Administration is a department within the U.S. Department of Housing and Urban Development. It was established in 1934 to encourage home ownership among the wider population. The minimum down payment required for an FHA loan is just 3.5%. That means a $100,000 property can be yours for just $3,500 plus closing costs. Lending criteria apply, though credit standards are often lower than they are for conventional loans. That's why FHA loans are the number one choice for first-time buyers, who take out the millions of dollars worth of FHA-backed loans each year.
Minimum Down Payment for a Veterans Affairs Loans
The VA loan is the best mortgage product out there, bar none. If you qualify, you could find yourself with a new home in Arlington Texas with zero down. The catch? VA loans are only available to borrowers on active duty and those who previously have served stints in the U.S. military.
Minimum Down Payment for Conventional Loans
The range of conventional loans on offer in the market is as broad as it is long, and you can find a minimum down payment requirements anywhere from 5% to 20%. In today's tough lending environment, you'll need a pretty high FICO score to land a 5% deal. The trend is towards a 20% down payment.
The Low Down Catch: Mortgage Insurance
On the face of it, a government-backed loan from the VA or the FHA seems like a great deal for first-time buyers struggling to save a down payment. The catch is mortgage insurance, which can add significantly to the cost of the loan. The Federal Housing Administration charges mortgage insurance premiums to all its borrowers, regardless of the size of the loan. Borrowers pay an upfront one-time fee of 1.75 percent of the loan size, which is automatically added to the loan balance at closing. They also pay an annual fee of up to 1.35 percent of the loan size, which is collected with the mortgage payment each month.
Conventional loans with lower than 20% down also charge private mortgage insurance. Premiums follow a sliding scale, depending on how much equity you have in your home. With 20% down, there is no PMI on a conventional loan.
So How Much Should a First-Time Buyer Put Down?
With 20% percent down, you won't have to pay mortgage insurance and you typically get a better rate. Also, sellers like high-down buyers. Buyers with conventional financing typically rank ahead of FHA borrowers when multiple offers are placed for a home.
On the downside, it can take years to save a 20% down payment. In the meantime, property prices may rise, putting your dream of home ownership in Arlington Texas further out of reach. Even if you have saved a large pot of cash, blowing it all on a down payment is not necessarily the smartest move. Owning a house is expensive, and it is wise to keep a rainy day fund for emergency home repairs or to see you through unexpected tough times, such as illness or losing your job. The more you can put down the better, but putting down the amount you feel comfortable with is best.
Contact Kimberly Grogan at 682-422-7176 or visit TheGroganGroup.net to find the mortgage option that will work best for your new home.
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