What’s the deal with down payments?
Hey there, first-time home buyers! If you’re on the house-hunting journey, you’ve probably had a few nagging questions about down payments.
Don’t worry; you’re not alone.
We’re going to dive into the world of down payments, and we promise it’s manageable. So, let’s get started with one of the most common questions we hear:
Do I have to have 20% down on a home?
The short answer? No, you don’t need to have 20% of the home’s price stashed away under your mattress (or, preferably, in the bank).
While putting down 20% is often considered the gold standard, it’s not a rigid rule and would ruin a majority of the market’s potential to buy!
It DOES avoid an extra cost that’s added to your mortgage called Private Mortgage Insurance (PMI for short), but the cost of this is fairly low. You can buy a home with a down payment as low as 3% to 5%, even with conventional mortgages.
Having a smaller down payment might lead to additional costs, such as private mortgage insurance (PMI), but it can be a good starting point for anyone eager to own their piece of paradise. According to the National Association of Realtors, in 2020, the median down payment for first-time buyers was 7%.
This is one part of knowing what you can afford
Typically, calculations are focused on the monthly mortgage payment you can afford. And that’s a major piece of it!
But the other is your down payment, for two reasons:
- Knowing what you can pull together shows you what your 5% threshold is
- The larger your initial payment, the lower your mortgage becomes
Let’s take an example: If you know you can pay $20,000 as a down payment (remember – there’s other fees and expenses associated with buying a home, your agent will prepare you for it all!), then that’s 5% of $400,000.
Tip: You can simply enter “what is $20,000 5% of?” into your search engine to quickly find out. Simply replace either the dollar amount or the percentage to make adjustments as needed!
If your agent knows your maximum price point, you can quickly get a sense if the homes available in your price range fit what you’re looking for.
How can I save for a down payment?
Saving for a down payment can be a bit of a puzzle, but with determination and a solid plan, you can achieve your goals. Here are some tips:
- Budget Like a Pro: Start by creating a budget and sticking to it. This means cutting back on those daily lattes, dining out, or impulse shopping, and finding creative ways to save a few extra bucks each month.
- Automate Savings: Set up automatic transfers to a dedicated savings account. Out of sight, out of mind, right? When you automate your savings, you’re less likely to spend that money impulsively.
- Side Hustles: Consider taking up a side gig or selling items you no longer need. Every extra dollar counts! You might be surprised how a hobby or freelance work can help boost your savings.
- Explore Down Payment Assistance Programs: This brings us to our next question…
What is down payment assistance?
Down payment assistance (DPA) programs are like a helping hand from the heavens for those who need them. They can provide financial support to qualified buyers who are struggling to gather the necessary down payment. These programs can be offered by local or state government agencies, nonprofits, or even your lender.
DPA programs come in various forms, such as grants, loans, or tax credits. They may have specific requirements and income limits, but they’re worth exploring if you need a little boost to make home ownership a reality.
Some common types of down payment assistance include:
- Grants: These are funds provided that do not need to be repaid. They are typically awarded to low-income or first-time homebuyers.
- Loans: Some programs offer low-interest or forgivable loans that can be used for your down payment. These loans may have specific terms and conditions, so it’s crucial to understand the repayment requirements.
- Tax Credits: Some states offer tax credits that can reduce the income tax you owe, effectively putting more money in your pocket.
The Urban Institute reports down payment assistance programs have helped over 1 million home buyers in the past two decades. These programs have made home ownership more accessible to individuals who might not have otherwise been able to afford it.
What is zero down?
Zero down, often referred to as “no money down,” sounds too good to be true, but it’s not a myth. Some mortgage programs, like the VA loan for veterans and the USDA loan for rural areas, offer the opportunity to buy a home without a down payment. That’s right, zero down!
For those who qualify, these programs can be a fantastic option, but they do come with their own set of eligibility criteria. If you fit the bill, you can skip the down payment entirely.
Items to remember
No matter which mortgage type you choose, it’s important to remember you’ll still need to cover closing costs, which are separate from the down payment. These typically range from 2% to 5% of the home’s purchase price and will be due on the day you buy the home.
For a $250,000 home, that could be anywhere from $5,000-$12,500 due at signing just for closing. (This amount can be negotiated as part of your offer – your agent will know if there’s wiggle room and if you can push for the seller to contribute).
There are other expenses you’ll encounter in the buying process, too, such as:
- Home inspection
- Legal fees
- Home appraisal
- and more
There’s lots more to help you prepare in our buying a home guide!
They can guide you through the process, helping you navigate the exciting world of down payments, one step at a time.
In the end, it’s all about finding the right balance between your down payment, monthly mortgage, and long-term financial goals. So, get ready to find your dream home and love where you live!