10 Things to Know About Down Payments
Conventional wisdom says you need 20 percent of a home’s selling price to put down in order to purchase it. That’s not the case (especially for first-time homebuyers), though it’s still considered a best practices suggestion, if possible. According to the National Association of Realtors, more than 70 percent of first-time homebuyers made down payments of less than 20 percent in the last five years. A total of 54 percent of all buyers made down payments of less than 20 percent. There are a lot of things to know to understand a down payment. Near the top of the list is understanding what a down payment actually means.
What is a Down Payment?
The first lump of money is considered earnest money because it shows you are serious about purchasing the house. It is also considered a contract deposit and goes into an escrow account, which is held by the seller’s lawyer.
Follow these steps on what to know about buying a home.
Know How Much You Have to Put Down
The Veterans Administration allows no money down financing for U.S. military veterans only and the U.S. Department of Agriculture loan programs allow no money down financing as long as the home is in a rural area and you meet the low-income thresholds.
Find out other secrets of home buying.
Putting 20 Percent Down Lets You Avoid Mortgage Insurance
For a conventional loan you’ll have to pay mortgage insurance until you have 20 percent equity. When the loan balance dips to 78 percent of the mortgage, the mortgage provider is required to drop the mortgage insurance.
Federal Housing Administration loans require mortgage insurance be paid for as long as the loan is in place for loans taken out after June 2013.
You can make monthly mortgage insurance payments, a one-time payment, or have the lender pay the mortgage insurance if you agree to a higher interest rate. The last option will keep your monthly payments lower than if you paid PMI at one time but you’ll have to pay on the insurance until you repay the loan or refinance.
If you want to stop paying mortgage insurance quicker there are a few routes. An appraisal might raise the value of the home and you could meet the 20 percent threshold. Making additional loan payments will increase your equity as well or you can remodel your home to increase the value.
Understand Inspection Contingencies
Be prepared for later steps in the process by knowing what to look for in a home inspection.
Pre-Qualified vs. Pre-Approved: What’s the difference?
Consult these 10 things to know about buying a house.
Getting Help With Down Payments Requires Extra Steps
For a FHA loan, the donor will also be required to provide a bank statement on top of the letter.
A down payment of 20 percent can be made up entirely of a gift, but anything less than 20 percent, a portion of the down payment must come from your own funds.
Be Prepared for Additional Closing Costs
While you’re spending all of this hard-earned money, be sure to budget your move to cut down on expenses.
Know the Perks of Being a First-Time Homebuyer
Learn the Loan-to-Value Ratio
After you’ve got that all figured out, start researching how to fix things around the house.
Consider Your Cash Reserves
As you decide how to approach the down payment, try to avoid these home buying mistakes.