When you are buying a house, your down payment plays a vital role in the whole process. The down payment on a house is the percentage of the house’s buying price that is paid upfront when the loan deal is completed.
To the lenders, the down payment is considered as your investment in the home. The down payment on a house will not only influence how much that would be borrowed but also your interest rate. Since the payment stands for your investment in the house, the lender would usually give a reduced rate if a higher down payment can be made.
Also, it can determine whether the lender will request a Private Mortgage Insurance (PMI). Usually, a PMI is required if you pay less than 20% of the home’s buying price.
So, how much down payment on a house is required ? This would be based on the buying price of the house and the loan mechanism. Loan programs come with a different interest rate ranging from 5 percent to 20 percent.
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The biggest setback for any prospective home buyer is coming up with adequate money for a down payment to buy a home. Therefore, the minimum down payment is determined by the type of mortgage, your income, and your lender. So, how much down payment do you require?
What Is Down Payment?
A down payment is an amount that is paid upfront to purchase a house or a car and it’s calculated as a percentage of the total price. For instance, a 10% down payment on a $250,000 home would be $25,000.
If you are applying for a mortgage to purchase a house, the down payment is what you contribute towards buying the house; this stands for your initial state towards owning the property.
Usually, lenders request for a down payment on mortgages, though there are exceptions with USDA loans and VA loans. These types of loans are supported by the Federal government and do not require down payment.
What Are The Requirements For Down Payment On A House ?
Agreeing to pay a minimum of 20 percent upfront on the purchase of a house would boost your chances of getting approval for a mortgage at a good rate and this means you would avoid mortgage insurance.
However, it’s possible to offer less than 20 percent down payment. Therefore, the minimum down payment varies from house to house depending on the type of mortgage plan.
This is backed by the Federal Housing Administration (FHA) which is under the United States Department of Housing and Urban Development (HUD) – a Federal government agency. It requires as low as a 3.5 percent down payment of the house buying price. This implies that the down payment for $350,000 would be $12,250 with this type of loan.
VA and USDA Loans
The VA loans are backed by the United States Department of Veterans Affairs. It does not need a down payment. The VA loans are designed for serving and veteran military servicemen and spouses who are eligible.
Also, the USDA loans are backed by the United States Department of Agriculture’s Rural Development Program. Like the VA loans, the USDA loan does not require down payment too. These loans are designed for suburban and rural homebuyers who qualify for the income limit and other conditions.
Therefore, other conventional mortgages like the Freddie Mac Home Possible mortgages and the Fannie Mae HomeReady mortgage require as low as 3 percent down payment. These conventional loans are not supported by the government but comply with all guidelines laid down by the government.
These requirements vary from one lender to another and also the credit history of the borrower. The least down payment for an FHA loan is 3.5 percent and a credit score of 580 or more. Besides, a minimum of 10 percent with a credit score of between 500 to 579 is acceptable.
So, all these loans allow a part of the buyer’s down payment to be money from a down payment assistance program or gift from members of a family. Some merchants allow buyers to save part of the down payment when the home is being constructed.
Benefits Of A Higher Down Payment
Getting money ready to buy a home could be time-consuming, so, a low to zero down payment requirement would boost your chances of getting a home. Therefore, a higher down payment has several advantages, these are;
A reduced monthly mortgage payment
A lower ongoing and upfront payment
A good mortgage interest rate
Better equity in your home right off.
Having a lower down payment makes the loan look risky to the lender. Besides, government-supported mortgage programs like VA, USDA, and FHA loans lower the risk by giving a part of the loan. So, if a borrower does not meet up with any of these loans, the agency in charge will reimburse the lending company for whatever is owed. However, you make payment through mortgage insurance depending on the type of program.
Also, for the conventional mortgage, you would be required to pay for private mortgage insurance if you pay less than 20 percent down payment.
Down Payment Needed To Acquire A House
This would usually depend on your target and financial goals. A higher down payment implies a reduced monthly mortgage payment, and having a higher initial payment could leave you cash-strapped after moving into the property.
The following tips are useful for determining the right down payment on a house;
Do not spend all your savings on down payment because there would be a need for cash after moving in.
Have a budget you can work with and save enough cash to cater for emergencies, maintenance, and other miscellaneous expenses.
You can use a mortgage calculator – this would help you determine how the down payment directly affects the monthly mortgage fee.
In getting the best deal, it’s essential you shop and compare mortgage rates and offers from different lenders in the market.