Home Down Payment: How Much Should You Save?
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Do you know how much you should save for a down payment on your home? Although you may have heard 20%, the answer isn’t quite as straightforward as that. Here are some tips to help you know what you should have for the down payment on your new home.
Defining the Down Payment
Before we get started, it is a good idea to understand what the down payment is. This is the money that you will use as the initial payment toward your new home. It is the difference between the cost of the home and what the bank is willing to lend.
When a lending institution considers you for a mortgage, they will want to be sure that you have some money saved for the down payment. Typically, you will need between 5 and 20% of the loan amount, although some loans can be higher or lower.
Why Are Down Payments Different Between Loans
What you will be required to put as a down payment depends on a large number of factors. Here are a few:
- Your Credit Score: Those will better scores can sometimes get a loan that requires a lower down payment.
- Interest Rate: If you are willing to put more money down on your home, then banks may be willing to lower you interest rate.
- Terms: Banks may be willing to give you a shorter termed loan if you put down a large enough down payment.
- PMI: If you take out private mortgage insurance that you pay monthly, you may be able to put down less on your home.
- Programs: Sometimes there are special programs available to buyers that help reduce their down payment. Always check with your lender to see if you qualify for programs for Veterans, first-time buyers, lower income buyers, teachers, and more.
Saving Before You Buy
Since you cannot know the exact amount you will need for a down payment before you find a loan, it may seem difficult to know how much to save. However, there are a few things you can do to help get you started.
The first is to figure out 28% of your gross monthly income. Simply add your gross income (that’s income before taxes) and multiply it by 0.28. This will tell you how much you should be able to afford for your mortgage payment including taxes and insurance. Next, find a mortgage calculator and plug in your mortgage number to figure out how much home you can afford. Finally, begin saving 20% of that number plus about 4% for closing costs.
Of course, if you know that you qualify for a particular program, you can change the amount you save.
Down Payment Amounts for Different Loans
Here are some of the more popular loan types. If you know that you can qualify for a particular loan, that will help you know the percentage to save. For most loans, you will be required to pay closing costs which are up to 5% of the loan’s value.
- VA Loan: Veterans do not have to pay a down payment or private mortgage insurance. For questions about qualifying for a VA loan, contact the Department of Veterans Affairs.
- USDA Rural Development Loan: There is no down payment on this loan, however, this loan is only for specific areas and for those with low incomes. The best times to qualify for this loan are in October and November because funds run out quickly.
- FHA Loan: FHA loans typically require 3 to 5% of the home’s purchase price as a down payment. Unlike conventional loans, you can receive your down payment as a gift.
- Conventional Loan: A down payment for this loan varies from 5 to 20% depending on the home and your credit. If you put down less than 20%, you will be required to have private mortgage insurance.
Saving for a down payment before you fall in love with a house is a wise move. For more information on down payments and loans you may qualify for, feel free to give us a call.