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All About Down Payments

Thursday, July 14, 2022   /   by Margie Wright

All About Down Payments

One of the big key terms that you'll hear when starting the home buying process is "down payment." And for good reason. A down payment on your home is one of the biggest things you need to budget for. You may have heard that you need a 20% down payment, but that's not entirely the case. There are benefits to a 20% down payment, but it's not the only option which means that home ownership is actually a lot closer to being attainable than you think. Plus, with the addition of down payment programs, it's even more attainable! With the down payment being what causes most people to wait or skip on buying a home, there are options out there to help change that.

Saving Up
If you're going the route of saving up on your own, start saving up immediately. Depending on how much you plan on putting down, it could take several years to have that money saved up. Of course, this depends on many factors. How much you earn, whether you're buying with a partner or solo, and whether you already have money saved up that you might consider using. If one of your life goals is to buy a home, then start saving now! Having that reserve set up can lessen or eliminate the time you have to take to reach that down payment goal. 

Down Payment Assistance Programs
If your main hurdle is being able to save up a massive amount for your down payment, don't fret! There are programs to help with that! Whether you've bought before or are a first-time buyer, there are many programs available to help you. From various first-time homebuyer programs to programs that help those that have bought before, there are even more options available!

In the area you're wanting to buy and live in, look into what local programs already exist to help. Certain counties or regions may have programs to help with covering down payments on certain kinds of housing. Sometimes your profession can also help you out. If you serve your community, it's likely there's a program that will help you financially. Teachers, first responders, health providers, government employees, active-duty military personnel, and veterans all have available programs to help with mortgages and down payments. If you fit into any of these categories, look into what's available to you! Ask your real estate agent and loan officer for help as well. They'll know what's available and possibly know of programs that may not show up in your own searches. 

Ultimately, there are several local, state, and federal options out there for you to look at. As long as you meet the requirements, you'll be set! 

Down Payment Amount
Despite the common idea that you have to put 20% down, unless specified by your loan type or lender, 20% down isn't necessary. In fact, most home buyers don't put 20% down on their home. They go much lower than that. 20% does come with its perks, but it can seem daunting and unattainable for many people. (Don't worry - we'll discuss the perks to 20% down in the next section). How much you put into your down payment entirely depends on your loan type, lender, and what you have already saved away. 

You'll also know about how much to expect from your down payment assistance program. They'll give you the percentage you'll need to put down, and then you can calculate the rough estimate based on your budget. You'll get a good idea of how much you need to have set aside for that based on your calculations. 

Perks of 20% Down Payment
While it may be tempting to find a program that allows you to have a lower down payment (some as low as 3.5%), it may not always be the best option if you can afford to put 20% down. Here's why putting 20% down is a good idea if you can do it:

- Possibly Lower Interest Rate: A 20% down payment shows your lender you're more financially stable and not a large credit risk. The more confident your lender is in your credit score and ability to pay your loan, the more likely they'll be to give you a lower mortgage interest rate.

- Pay Less for Your Home: The larger your down payment, the smaller your loan amount will be for your mortgage. Paying 20% of the cost of your new home at the start means you'll only pay interest on the remaining 80%. If you only put 5% down, that additional 15% will be added to your loan and accrue interest over time. IN the end, that'll cost you more.

- Your Offer Will Stand Out: In this competitive market, sellers often like to see offers come in with 20% or larger down payments. It gives the seller the same confidence as the lender in this scenario. You're seen as a stronger buyer with financing more likely to be approved. This means that the deal will more likely go through. 

- You Won't Have to Pay Private Mortgage Insurance (PMI): PMI is an added insurance policy for homeowners that protects the lender if you are unable to pay your mortgage. It's a monthly that's rolled into your mortgage payment if you make a down payment less than 20%. If you put down less than 20%, your lender will see your loan as having more risk. PMI helps them recover their investment if you're unable to pay your loan. As long as you're putting down 20% or more, you don't have to worry about this additional charge.

If you're unsure about what to do, lean on a professional for help. Your loan officer, finance officer, and real estate agent can help you understand all the options available to you (and possible give you more options). Don't feel that you have to put 20% down on your new home. While there are perks, it may not fit right with your situation. Each situation is unique, and what's best for one person may not be best for you. That's why we have options!

  homes, homeowners, tips, homebuyers, buyers, financing

Hurst Real Estate and Auction - Margie Wright Property Marketing Group
Margie Wright
221 East Main Street, Suite 103
Morristown, TN 37814

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