What an exciting time! You’re finally getting ready to embark on homeownership. Whether you’re a first-time homebuyer or selling an existing home and moving across town, there’s a lot that goes into determining how much home you can afford.
Calculating the monthly payment is important moving forward, but the down payment is equally vital. Depending on a few factors, the amount can vary greatly. Here’s how to figure out what you REALLY need to put down at the end of the day.
First-Time Homebuyer Programs
If this is your very first time obtaining a mortgage and purchasing a home, check out a first-time homebuyer loan program. Offered through lenders like USDA, FHA, and the VA, most are government-backed and have restrictions and regulations on the mortgage terms.
The good news is that the down payment ranges from 3% to 5% down; in some cases, it can be less than that. First, you need to pre-qualify. Talk to a mortgage lender about applying. You’ll need a decent credit score, typically above 580 (but the higher, the better), and have a good income coming in.
Loan requirements are lax compared to a conventional mortgage, but it’s a great way to step into homeownership without breaking your savings account.
When you walk into your local bank or even an online lender, they generally offer competitive rates on home mortgage loans. These “conventional mortgages” often require around 20% down of the total amount that you plan to borrow.
For example, if you’re approved and put an offer on a home for $200,000, expect to put a down payment of around $40,000. This is not a good-faith down payment to the realtor but a separate payment to secure the loan with the bank. You’ll also need to add in any fees or closing costs associated with the sale of the home.
More Money, More Power
Regardless of what loan you are approved for, the more money you have saved up for a down payment, the better. You can use those extra funds to secure the property with an offer, and you’ll get the money back as long as you follow through. It can come in handy if you’re caught in a potential bidding war with another prospective buyer.
It’s also not going to hurt to have money set aside to make any repairs or upgrades to the property after closing. Those funds can also go toward the mortgage to help pay down on the principal.
The loan-to-value ratio, or LTV, is an important component when brokers prepare your mortgage and finalize the underwriting. The lender looks closely at the property’s fair market value and the final property appraisal.
If the house’s price is way undervalued and you have a big down payment, you pose less risk, and your interest rate will be lower. This gives you a lower LTV. If you have a lower or zero down payment and a large mortgage, you may need to get private mortgage insurance on your loan to secure the property for the first few years.
While many mortgages require small amounts down, many do not. Overall, having as much money as possible to put down on a new real estate transaction is to your advantage. It gives you more wiggle room when you finally find the property you want. From there, after you get approved and the seller accepts your offer, you’re quickly on your path to new homeownership. Congratulations!