Once you have been prequalified for your new home, found said home, and negotiated said home, you will then be marching toward closing. Closing is when the actual transaction takes place, the warranty deed is signed over, and you officially become the new owner of the property.
At this point, you and the seller will then act upon everything that has been agreed upon. So if you negotiated a warranty, a new roof, or their pet ferret, you then will complete the purchase and make the exchange.
Part of that exchange will be your down payment to the lender.
Now, we looked at a high-level view of mortgages, and each will have a minimum of 3% for conventional, 3.5% for FHA, or even 0% for VA required at closing. But how do you know how much you need to actually place as a down payment on your new home?
The first question you need to ask yourself is whether your mortgage requires mortgage insurance; most do.
You will want to see what is necessary to remove mortgage insurance and when. Oftentimes you have to put 20% down in order to have the mortgage insurance waived, or depending on the loan; it can be removed once you hit a certain loan to value that you can provide via appraisal.
The second question you will want to ask yourself is what payment you need to be at for your budget or Plan to Spend.
This will help you determine what amount or portion of savings you want to apply to the down payment. This will be an easy calculation that your bank or lending institution can tell you. Ask for an if/then scenario or, if you put a certain amount down and, based on the mortgage product you chose, how much that will affect your payment.
The third question you will want to ask is what else you may need to use that money for, whether it is debt paydown, funding college savings, investing, or some other aspect that you are aware of on the horizon.
Then you will need to go back to what your bank or lending institution requires and make sure that these questions are factored in. I found an article by NerdWallet discussing what down payment is required when purchasing a home. Some of this we have covered, but it\’s always helpful to solidify the approach;
- A down payment is the cash you pay upfront to make a large purchase, such as a car or a home, and is expressed as a percentage of the price.
- Putting at least 20% down on a home will increase your chances of getting approved for a mortgage at a decent rate and will allow you to avoid mortgage insurance.
- But you can put down less than 20%. The minimum down payment required for a house varies depending on the type of mortgage.
- Down payment requirements vary by the lender and the borrower\’s credit history. The minimum down payment for an FHA loan is just 3.5% with a credit score of 580 or higher, for example, but the minimum is 10% with a credit score of 500 to 579.
- Saving money takes time, so a zero or low down payment requirement may speed up your ability to buy a home. But making a larger down payment has advantages, which include:
- A better mortgage interest rate.
- Lower upfront and ongoing fees.
- More equity in your home right off the bat.
- A lower monthly mortgage payment.
- To help you determine the right down payment amount:
- Use a mortgage calculator to see how the down payment affects the monthly mortgage amount.
- Set a budget, and make sure you leave enough cash in hand for home maintenance and emergencies.
- Avoid using all your savings for a down payment. You\’ll need cash after you buy a home.
Remember that every person\’s financial position will be different to some degree or another. So looking at your specific goals will be greatly important in determining how much you should put down on your home above and beyond what\’s required from the lender.
CTA:
My call to action is to gain clarity on what amount you need to place as a down payment that will ensure that you are achieving your goals not only through the property you\’re purchasing but also from the standpoint of your personal finances otherwise.
Citation:
Bundrick, Hal. \”What Down Payment Is Required?\” NerdWallet, 6 Mar 2020, https://www.nerdwallet.com/article/mortgages/payment-buy-home.
