Clients have a lot of questions about down payments. Share this article with them to provide answers.
The American Dream centers on homeownership. Purchasing a home is a process that can be daunting for many, however, it can be made easier with these insights. Let’s explore the ins and outs of down payments to make your vision of home a reality.
Down payments are required by lenders to deter loan defaults. Different types of loans require a different percentage paid up front. United States Department of Agriculture and Veteran Affairs loans do not require down payments. A Federal Housing Association loan requires 3.5 percent down, 203k loans need 3.5 percent and HomeReady™ loans necessitate 3 percent down. On the higher end, conventional loans need between five and 20 percent, with jumbo loans requiring upwards of 20 percent. Down payments can come from your savings, gifts or personal loans.
FHA loans are today’s most popular option thanks to their low requirements. Your credit score also factors in with lenders. As little as 100 points in either direction could cost or save you money. Low credit scores translate into paying more over the course of a mortgage. Lenders want to see a solid financial history and if they don’t, they want to ensure you will be invested in the home. Those with scores below 580 may qualify with a 10 percent down payment. Scores of 580 or above will qualify for an FHA loan with a 3.5 percent down payment.
A higher down payment of at least 20 percent offers the benefit of avoiding mortgage insurance. With the exception of VA loans, private mortgage insurance (PMI) is required for down payments of less than 20 percent of the home’s value. PMI fees vary from loan to loan. Fees can be removed once the loan balance drops below 78 percent of the appraised value.
A larger down payment minimizes borrowing, averages less in total interest costs, offers lower monthly payments, enhances future borrowing power. On the other hand, smaller down payments do not require as much time to save, and they leave reserves for home improvement, retirement and emergencies. It’s up to you to decide if a larger or smaller down payment is right for you.
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