What you need to know about down payments.
If you’re thinking about buying a new home in the near future, you’ve probably already thought about financing your big purchase. Maybe you’ve even spoken with a loan officer about your options. Homebuyers are always looking for an attractive interest rate on their mortgage loan, but monthly payments are only part of the equation. Before your payment plan ever comes into play, you are going to have to consider your down payment.
Traditional wisdom suggests that a down payment should equal about 20% of the home price, with the mortgage loan then consisting of the remainder of the home value. But for some homebuyers, particularly first-time buyers without equity in a current home, saving up for a 20% down payment can be difficult. Fortunately, there are loans available that require a smaller down payment.
If you can’t manage the traditional 20% down, there are many alternative options and discuss some of these with your loan officer. A popular program for minimal down payment backed by Housing and Urban Development (HUD) is FHA loans. The down payment requirements for these can be as low as 3.5% and down payment funds can be derived from many sources including coming from a gift. In addition to the FHA loans, the VA loan, backed by Veterans Administration, is a program specializing in financing for those who have served in the armed forces. If you are a veteran or military service member, you can contact your VA benefits office to determine what you are eligible for, which could be a 0% down new first mortgage!
If you do qualify for a loan with a down payment requirement less than 20%, you will need to pay PMI (private mortgage insurance) which protects your lender in the case of defaulting. This payments can be broken up into monthly or one time lump sum with financing as an option, which should be discussed again with your loan officer. For FHA loans, you will likely have mortgage insurance premiums, which are paid up front as well as monthly. Finally, VA loans do have an initial funding fee for getting this type of loan.
How Can I Fund My Down Payment?
While most people will save for months to years to amass the money needed for a down payment, there are some other sources that lenders will accept as part of a down payment. Gift money, as noted above, from a family member can sometimes be used, but its source must be documented. Your lender can explain the process for using gift money as part of your down payment. There are also programs run by state and local governments to provide assistance with making a down payment. These are programs for which you must qualify.
Some homebuyers choose to liquidate other existing assets in order to come up with the cash for a down payment. This might mean selling stocks or other investments or cashing out a retirement account. Proper documentation will be required.
If you already own a home, it’s likely that you will use some of the cash from the sale of your current home to help provide the down payment on your new property. Your loan offer can help you navigate this process so that you close on the sale of your current property prior to closing on your new property.
If you still have questions surrounding your down payment, talk to your loan officer. He or she is the expert in home financing and can help you examine your situation and determine your best course of action for making a down payment on your new home.