Buying

How Much to Put Down on a House

It’s crucial that you have a plan in place to decide how cash you will need to have on hand as a down payment for your new home.

Purchasing a home can be one of the most exciting times in your life. The anticipation associated with purchasing a new house, especially if it’s your first, often overshadows the fact that you’re making a decades-long commitment to repaying a loan. Unless you have access to the funds that you need in order to purchase the home in full, you will have to take out a mortgage. One of the key components to a mortgage is the down payment. These down payments are calculated based on a percentage of the amount that you will be borrowing in order to buy your home. It’s crucial that you have a plan in place to decide how cash you will need to have on hand as a down payment for your new home.

What is a Down Payment?

Before we get into the budget planning portion of the mortgage, let’s get a good understanding of what a down payment is. Mortgage lenders require a down payment as a way of protecting themselves against borrowers defaulting on the loans. For instance, if a lender requires 10% of a total loan in the form of a down payment, you will need to put $10,000 down on a $100,000 loan. This is the lender’s way of ensuring that they get something out of lending you money in the event that you default on the loan. Obviously, interest rates and the threat of foreclosure also protect lenders from defaulting borrowers, but down payments serve as the first layer of protection.

The 20% Myth

There has long been a myth floating around the real estate industry that says that you will need to put 20% down in order to purchase a home. While some mortgage lenders do require a 20% down payment on conventional mortgages, there are other loan types on the market that require a much lower percentage to be paid up front.

It’s worth noting that if you have access to 20% of the total price of the home, using it as a down payment may have benefits. Let’s say that you’re interested in purchasing that $100,000 home that we discussed earlier. If you pay 20% down, or $20,000, you will only have to borrow $80,000. If you take out a 30-year mortgage, your principal payment would only be around $222 per month. Obviously, that doesn’t include interest rates, but having a base payment of only $222 would be an incredible opportunity. Having said that, not having access to a large surplus of cash doesn’t disqualify you from home ownership, no matter what conventional wisdom says.

So, What’s Normal?

According to the National Association of Realtors, the average down payment paid by American home buyers was around 11% in 2016. However, the concept of determining what a “normal” down payment depends on a variety of factors. Age, marital status, credit history, personal savings and your income all play a role in determining how much of a down payment you should plan on paying.

For instance, the same 2016 study published by the National Association of Realtors indicated that home buyers who were younger than 35 paid around 8% down on their homes. This number was influenced by the fact that they weren’t as advanced in their careers and thus had a lower salary than older home buyers. Their lower salary, combined with less savings meant that they had less to put down. They were also able to pay less down because they planned on working longer than home buyers who were closer to 50 and didn’t need to worry about paying off a home as quickly.

Additionally, married couples purchasing a home are able to put down higher amounts because they are working with two incomes. Additionally, people with lower credit scores were forced to make higher down payments because lenders want to protect themselves against people who have a less than stellar credit score. All of these variables make it nearly impossible to determine what a normal down payment percentage is.

Different Loan Types

It’s also crucial that you understand that different types of loans require different down payments. While a real estate agent or a lending professional can give you more in-depth information about the amount that you will need for various types of loans, there are some general rules that apply across the board.

For instance, FHA loans require a 3.5% down payment. This type of loan goes through a federal program that was initially created to help stimulate a struggling housing market. While many people want to use this type of loan in order to take advantage of the lower down payment requirements, it’s vital to understand that the subject property will go through a thorough inspection that has some rigorous standards. There are several factors that can preclude a home from being eligible for an FHA loan, so you shouldn’t assume that you can get an FHA loan.

Military members who are eligible for VA loans can even get loans without putting any money down. Again, this type of loan goes through a federal program that was designed to help the men and women who have defended our country get housing once their service has ended. Again, there are requirements that must be met so you shouldn’t bank on getting one of these loans without being sure that you and the home that you’re trying to buy are eligible.

By all accounts, it’s a good idea to have a few thousand dollars on hand whenever you’re planning on buying a home. That doesn’t mean that you have to amass an astronomical amount of personal wealth but having a decent nest egg on hand is advised by Realtors and lenders alike. If you don’t need the money for a down payment, you will still need to cover your part of closing costs, moving expenses and other fees associated with buying a home. Being informed about down payment requirements helps you create the budget that you’ll need before you ever start deciding on which home to purchase. Happy house hunting.

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