14 Sep 2017

Buying a home? Learn about your down payment options now

If you’re in the market to buy your first home, you’ve likely heard about the down payment you’ll be required to come to the table with. If, upon hearing this, your first thought was to plot a scheme to rob the nearest bank, don’t do that— I hear that’s frowned upon in many social circles. Instead, why don’t you take a breath and read through your options. Because you’ve certainly got options, and lots of them, when it comes to down payments.

Conventional loans

Available through Fannie Mae and Freddie Mac, these government-backed loans offer borrowers some pretty appealing mortgage options. Qualified buyers can purchase a home with as little as 3 percent down thanks to the good folks at Fannie and Freddie.

FHA loans

FHA loans are often the best option for first-time buyers. Less than stellar credit and not a lot of cash up front? FHA loans are your saving grace. Home buyers that go through FHA to finance their home are able to do so with as little as 3.5 percent down.

VA loans

For members of the military, veterans, reservists and National Guard, loans backed by Veterans Affairs can be obtained without any down payment. PMI or private mortgage insurance that is typically required for loans obtained without a minimum down payment of 20 percent is not required with VA loans— another huge plus.

USDA loans

Backed by the United States Department of Agriculture, eligible rural and suburban home buyers can qualify for zero down payment loans with low interest rates. If the hustle and bustle of big city living has never been your scene, sit down with a lender to check and see if the home you’re interested in meets USDA criteria.

Down payment and interest rate

While a plethora of low down payment mortgage options exist, it’s important to keep in mind the realities of financing the majority of the home’s purchase price. Usually, buyers willing to make a larger down payment are positioned more favorably with lenders and may earn a lower mortgage interest rate. Buyers who can come up with at least 20 percent of the home’s purchase price are exempt from having to pay PMI, too. You’ll also build equity in your home quicker if you put more cash down in the onset.

Private Mortgage Insurance (PMI)

Buyers who take advantage of low down payment mortgages are often hit with PMI. PMI exists to protect the lender in the event that the borrower defaults on the loan, and is typically .3 to 1.5 percent of the original loan value. The good news here? PMI will fall off your mortgage once you’ve got 22 percent equity in your home.

Don’t drain your savings

The down payment isn’t the only expense you’ll be feeling when you purchase a home. Homeowners insurance, closing costs, inspections and property taxes all come due, too. Additionally, you’ll likely be purchasing furniture, or making updates or enhancements to your new space that will all require cash. You’ll also want to save about 2 percent of the purchase price of your home each year for unplanned expenses like replacing the water heater or servicing the a/c unit.

Pre-approval is what’s important

Some borrowers worry that only coming to the table with the minimum down payment required will negatively position them in a seller’s market. Push that doubt out of your mind and focus on making sure you’re pre-approved instead. In today’s low inventory market, a buyer who’s pre-approved for a mortgage is more desirable to a seller than a buyer who offers a larger down payment and is not pre-approved.

Purchasing a home is a smart investment

All of these dollar signs starting to make you feel dizzy? Don’t get light-headed— making mortgage payments each month as opposed to rent payments dramatically increases your overall wealth in the long run. With each payment you make you’ll be reducing the balance on your mortgage while simultaneously building equity on your investment— and if you’re smart, your investment is likely to pay off big time come retirement.

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