Moving Family Forward
 

How Much of a Downpayment Do You Really Need?

If you’ve been putting off purchasing a home because you heard that you need 20% down, we have good news for you… you don’t! This common misconception of needing 20% down to purchase a home deters people from thinking they can buy, when really you need at least 3% down with most loans.

With the recent passing of the new stimulus package, 85% of American’s are receiving stimulus checks. For most single individuals this means an extra $1,400, but for say, a family of 4, you could receive $5,600. While the amount you get for your stimulus check may not be enough to cover a down payment, it can certainly cut down the amount you need to save to get that 3% down on a home depending on the type of loan you receive. Speaking of down payments and loans, let’s uncover what all that means.

  • What is a Down Payment?

    With any large purchase, a down payment is typically required, and is expressed as a percentage of the price.

    When applying for a mortgage to buy a house, the down payment is your contribution toward the purchase and represents your initial ownership stake in the home. The lender provides the rest of the money to buy the property.

    Over time, you pay the lender back, plus interest.

  • Different Types of Loans

    As mentioned, 20% down on a home is not required. There are several loans that allow you to put 0-20% down depending on several factors. Let’s take a look at these various loans: FHA Loans, VA Loans, USDA Loans, and Conventional Loans.

  • FHA Loans

    FHA loans are backed by the Federal Housing Administration. They allow borrowers to finance homes with down payments as low as 3.5% and are especially popular with first-time homebuyers.

    To qualify for a FHA loan:

    • Have a FICO® score at least 580 = 3.5% down payment.
    • Have a FICO® score between 500 and 579 = 10% down payment.
    • MIP (Mortgage Insurance Premium ) is required.
    • Your debt-to-income ratio must be under 43%.
    • The home must be the borrower's primary residence.
    • The borrower must have steady income and proof of employment.

    So what does this look like number wise?

    • Cost of home: $250,000
    • Down payment: 3.5% ($8,750)
    • Interest rate: 3.5%
    • Term: 30 years
    • Mortgage monthly payment: $1,314
    • *All numbers are before MIP.
  • VA Loans

    VA loans are for current and veteran military service members and eligible to surviving spouses. With a VA loan, a down payment is not required nor is PMI (Private Mortgage Insurance). However, because a down payment is not required, your monthly payment will be larger.

    • Cost of home: $250,000
    • Down payment: 0% ($0)
    • Interest rate: 3.5%
    • Term: 30 years
    • Mortgage monthly payment: $1,353
  • USDA Loans

    A USDA home loan is a zero down payment mortgage for eligible rural homebuyers. USDA loans are issued through the USDA loan program, also known as the USDA Rural Development Guaranteed Housing Loan Program, by the United States Department of Agriculture.

    USDA loans allow a qualifying individual to get low mortgage interest rates, even without a down payment. If you put little or no money down, you will have to pay a mortgage insurance premium, though.

    To qualify for a USDA loan:

    • U.S. citizenship (or permanent residency)
    • A monthly payment — including principal, interest, insurance and taxes — that’s 29% or less of your monthly income. Other monthly debt payments you make cannot exceed 41% of your income. 
    • Dependable income, typically for a minimum of 24 months
    • An acceptable credit history, with no accounts converted to collections within the last 12 months, among other criteria. 

    So what does this look like number wise?

    • Cost of home: $250,000
    • Down payment: 3% ($30,000)
    • Interest rate: 2.5%
    • Term: 30 years
    • *All numbers are before MIP.
  • Conventional Loans

    Conventional loans are not backed by the government, but follow the down payment guidelines set by the government. Conventional loans are often the best option for borrowers with strong credit who can contribute a down payment of at least 3%, or perhaps quite a bit more. 

    You'll generally need a credit score of at least 620 to qualify for a conventional loan, though a score that's above 740 will help you get the best rate. Depending on your financial status and the amount you're borrowing, you may be able to make a down payment that's as low as 3% with a conventional loan.

    So what does this look like number wise?

    • Cost of home: $250,000
    • Down payment: 3% ($8,250)
    • Interest rate: 4%
    • Term: 30 years
    • Mortgage monthly payment: $1,388
    • *All numbers are before MIP.
  • Benefits of Putting More Money Down

    While 20% is not required as discussed in the various loans breakdown, it certainly helps to put more down when possible. 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.

    Fees incur when you put less down because it’s a larger risk in the eyes of the lender. Government-backed mortgage programs, such as FHA, VA and USDA loans, reduce the risk by guaranteeing a portion of the loans. If a borrower defaults on one of these loans, the associated government agency will reimburse the lender for what the borrower owes. But you pay for the guarantee through fees or mortgage insurance, depending on the program.

  • Conclusion

    With lower interest rates and various loan options, it’s time to buy the home you’ve always wanted especially if you’re in a place to use your stimulus check for a down payment. 

    There are several things you can do to get ready to buy your first home, from getting pre-approved to improving your credit score to talking with a loan officer to understand your options. Ready to get started? Contact one of our agents to learn more.