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Most lenders expect a home buyer to be able to show a down payment amount equal to 20% of the home's value. But the National Association of Realtors recently reported that the median down payment was only 6% for first-time buyers in 2019. Now, we know that it's always better to be able to put down a large down payment, but a difference of 14% really raises the question: How much do you really need to have saved to get a new home loan?
The case for having a large down paymentPrivate lenders issue most conventional mortgages to home buyers. They require home buyers to have a 20% down payment. The larger the down payment, the easier it is to show a mortgage lender that a buyer is committed and qualified.
Reasons to consider a conventional loan:
- You need to borrow a large amount of money
- To lock in a lower interest rate
- You have a high credit score and a low debt-to-income ratio
- To avoid PMI (private mortgage insurance), which adds to the cost of the loan
What if you only have a small down payment?While having a 20% down payment is ideal, obtaining that nest egg isn't something that many home buyers can do easily or quickly. A home co-investment can make it easier to obtain extra funds to reach a 20% down payment. Although there are qualifications and terms, home co-investments won't add to your debt. Additionally, many first-time home buyer programs are also available to help alleviate the stress of saving for that large 20% down payment. Programs are often coupled with rigid qualifications, special terms and insurances, but they make it possible for home buyers with minimal savings to close on a home.
Home co-investmentA home co-investment is worth considering if you are looking to lock in a conventional mortgage, but don't have the full 20% saved to reach that tier of lending. For example, here at Unison, we make it possible for a home buyer to put down 10% of the down payment using their own funds, and supplement their down payment by investing the rest, helping the buyer get to their 20% down payment. There's no extra debt, no interest and no monthly payments associated with a co-investment. br>
Federal Housing Administration (FHA) loanPut as little as 3.5% down with a government-backed loan. Buyers with less money, more debt, or less-than-perfect credit may qualify for an FHA loan if they meet strict debt-to-income guidelines and have 3.5% to put down. FHA loans contain two types of mortgage insurance. The first is a financed component, which raises your loan balance, and the second is a monthly policy. Contrary to popular belief, FHA monthly mortgage insurance can be removed after 11 years, provided the borrower has put down 10% or more. Otherwise, the only way to get out of FHA mortgage insurance is to refinance to a non-FHA loan.
VA loanServicemembers, veterans and eligible surviving spouses may qualify for a government-backed VA loan, which requires no down payment or PMI. However, some loans offered through the Department of Veterans Affairs do come with a funding fee, and the property must meet certain conditions. VA loans have a variable fee, and it can be zero if the veteran has a duty-related disability.
USDA loanFunded by the U.S. Department of Agriculture and servicing home buyers in rural areas, this loan also offers 0% down payment, low interest rates and low mortgage insurance premiums for buyers who meet specific income qualifications.
Fannie Mae/Freddie 3% down loanThese programs make it possible for homeowners within certain income qualifications to get a loan with just 3% down without needing to qualify for an FHA loan.
How to save for a down paymentWhen you've decided that homeownership is right for you and you're ready to explore buying real estate, start by reviewing your finances. Know what mortgage loan amount and monthly payments you can afford when you do eventually find your dream home. Online calculators may also help you estimate property taxes as well as closing costs that could be required to buy a home based on the purchase price. A total mortgage payment should be less than 35% of your salary (or roughly ⅓). For example, if your household income is $100,000 each year, your monthly mortgage payment should be no more than $2,750, and the home price might be around $300,000 (but remember that the home price is based on many variables). From there, calculate how much you'll need to have saved as a minimum down payment to afford the type of home you want to buy.
- Figure out how much you need to save and on what timeline.
- Look at your own costs and cut back if it means you'll be able to add more to your savings account every month until you've met your goals.
- Improve your credit score. The better your score, the more likely you'll qualify for financing, especially if you are trying to obtain a low-interest loan. Aim for a credit score of 580 or better.
- Set up an automatic savings plan and redirect a portion of your income directly into that account.
- Save your bonuses, birthday checks and tax returns because they can go a long way in helping you meet your goals faster.