When you buy a home, you can choose to pay for a portion of the home up-front without financing through a down payment. The down payment is given to the seller and the remaining balance is financed through your mortgage lender.
Even with all the home choices and mortgage programs available, you still have to narrow down your down payment options. Let us show you some of the factors that go into the decision.
How much funding do you have available for a down payment?
If you don’t have any money saved and no one is giving you the down payment as a gift, you may not be able to put very much money down. In this case, you will have to consider other options, which are listed below.
However, even if you could afford to put, for example, 40% of the home’s value down, should you do it?
A key factor to consider is that once you put money into your home, it may be difficult to access those funds in the future. You can refinance or sell the home to tap into the equity later; however, if rates are higher or you experience a financial setback such as loosing your job, accessing your equity may be difficult to impossible and certainly harder than simply withdrawing that money from the bank.
So if you can afford to put 40% down, but you might need some of that money for an emergency, investment, or other purchase, consider keeping some of it aside.
What type of loan are you doing?
Depending on your credit history and what you plan to do with the home, you may be required to make a down payment of up to 20%, which is the industry recommendation.
One reason a down payment is required is so that the bank has equity in the home in case you default and they have to sell your home. The other is so that you also have an incentive to pay your mortgage in order not to lose that down payment.
Some loans require small down payments or no down payments at all.
VA loans, and USDA Rural Development mortgages require no down payments, but come with restrictions. To obtain a VA loan you must be a veteran or active duty military with a valid Certificate of Eligibility (COE). USDA mortgages are only available in specific areas and have income limits. If you think you may be eligible for one of those, you can contact a qualified mortgage company to help determine your access and options.
You may also choose to get a Federal Housing Administration (FHA) loan, which requires 3.5 percent down but requires monthly mortgage insurance on top of the normal principal and interest payment.
For any other mortgage where you have less than 20% of the mortgage as a down payment, you will pay some sort of private mortgage insurance (PMI). For more information about the various forms of PMI and how PMI can be removed, visit the PMI section of our website by clicking the link below.
PMI does not go towards the equity of the house while a down payment does, so if you can afford to reach a 20% down payment, it usually makes better financial sense to do so.
Balance the down payment with your other considerations
Down payments can be tricky. After all, they will affect your monthly mortgage payment and the amount of home you can buy. Plus, if this is your first mortgage, you have a lot of other unfamiliar factors to consider in the home application process.
Read our ebook to find out more so you focus on getting the application completed first with a general idea of your down payment funding. Then, you can explore your exact down payment options later.
If you’re moving from one home you own into a new home, you will have other considerations, such as whether you need to sell your first home to use equity towards the new down payment. Our ebook Moving Up: Essential Loan Tips When Buying And Selling A Home At The Same Time can help alleviate the turmoil of the process.
No matter what kind of a borrower you are, it’s vital to consult an expert loan officer and verify your down payment plans. Sammamish Mortgage Company’s loan officers are experienced and more than willing to provide consultation.
Find out more about Sammamish Mortgage in our ebook, Why Choose Sammamish As Your Mortgage Company?