How Much Do You Really Need for a Down Payment?
If you want to purchase a home, you may be wondering how much to save for a down payment. Saving enough for a reasonable down payment can feel like an obstacle to homeownership, but what exactly is a “reasonable” amount of money to prepare for your purchase? Here are some of the ins and outs associated with a down payment and a few loan options that might be available to you.
What Is a Down Payment?
A down payment is generally defined as the amount of money paid upfront for a property, and it is expressed as a percentage of the total sales price. For example, a 5% down payment on a $200,000 home would be $10,000. Some sources suggest that a prospective homebuyer should strive to put down 20% of the value of the home, but is that really necessary for every purchase?
Putting 20% down can feel like an enormous barrier to homeownership, but luckily, buyers may have other options. Certain loan programs are available to a variety of buyers depending on their financial circumstances. Some of those loan types include:
FHA Loans
Sponsored by the Federal Housing Administration, FHA loans are offered through private mortgage lenders to qualified homebuyers. According to the Consumer Finance Protection Bureau (CFPB), FHA loans are “loans from private lenders that are regulated and insured by the Federal Housing Administration (FHA).”
FHA loans can allow for down payments as low as 3.5% of the property value if potential buyers qualify. However, this program does require mortgage insurance. FHA loans can be great for homebuyers seeking lower down payment options. To learn more about FHA loans, speak to one of our licensed mortgage professionals.
VA Loans
If you are a veteran or active-duty personnel, you may be eligible to receive a VA loan. Like FHA loans, VA loans are offered through private lenders. According to the Department of Veteran Affairs “VA Home Loans are provided by private lenders, such as banks and mortgage companies. VA guarantees a portion of the loan, enabling the lender to provide you with more favorable terms.”
A major benefit of VA loans is that they may not require any down payment. VA loans are also available to those in the National Guard, reservists, and surviving spouses, although the length of service, duty status, and other factors will determine eligibility for specific loan benefits.
Conventional Loans
Conventional loans generally require a minimum down payment of 3% for first-time homebuyers or 5% for repeat buyers, with 20% down allowing borrowers to avoid Private Mortgage Insurance (PMI). While 3% is the standard minimum, 5% down often offers better interest rates and is required for certain loan types, such as adjustable-rate mortgages.
State and Local Programs:
Many cities and states also have down payment assistance programs (DPA) for local residents. These programs often have income limits and are usually reserved for first-time homebuyers.
With several options available to homebuyers, down payments don’t have to be a roadblock to homeownership.
Experts at Strong Home Mortgage can help you understand all of your options. Compare rates and connect with a loan officer today or give us a call to learn more.