Buying a home is the most expensive transaction anyone in America can make, due to home prices. To achieve this goal, it is common for workers to turn to a home loan. Don’t feel bad, until the millionaires pay mortgages to buy their mansions. But since we do not all have the same capital, it is essential that you know that, to be guaranteed for a mortgage loan, among other requirements you must give a percentage of down payment on the property value.
Nationwide, the median price of an existing single-family home in the United States in 2020 was $ 274,600, according to the National Association of Realtors. But home prices can vary depending on their size, location, and condition.
What is the downpayment?
The down payment is the initial cash payment that has to be made in advance to make a major purchase such as a car and, of course, a house. It is down payment It is calculated as a percentage based on the price of the house you want to buy.
The usual advance that banks and lenders request is 20% of the value of the home. That means if you want to buy a $ 200,000 home and are seeking approval for a mortgage, in addition to meeting other requirements, you should have saved enough to make a down payment $ 40,000 minimum. The lender would contribute the remaining $ 160,000.
But there are down payments of less than 20%.
There are federal housing programs that some lenders accept as borrower support. Like any other type of benefit, you need to meet specific requirements. Here are some options:
- FHA loan: The Federal Housing Administration (FHA) allows you to give a 3.5% down payment with a credit score starting at 580.
- VA loan– The United States Department of Veterans Affairs (VA) offers members and family members of the active duty military or veterans the opportunity to qualify for a mortgage with no down payment or with a 3% advance if you want to get rid of mortgage insurance.
- USDA loan– Backed by the USDA Rural Development Program, they also have no down payment mortgage options, as long as they are occupied by buyers of rural or suburban homes that meet USDA requirements.
- Fannie Mae the Freddie Mac: Fannie Mae and Freddie Mac are government-sponsored companies that provide capital to the mortgage market and have designed homebuyer loan products to suit their ability. Their HomeReady (Fannie Mae) and Home Possible (Freddie Mac) programs can be your backing for the lender to accept between 3% and 3.5% deposit.
Is it better to give the 20% down payment?
Although the answer to this question will depend a lot on your finances and your savings, we are going to point out some of the advantages that you can acquire by giving a 20% down payment on a mortgage instead of using some of the aforementioned programs.
1. You improve your interest rateAlthough there is a national benchmark mortgage interest rate, it fluctuates depending on the lender and the borrower’s capacity. If the applicant can pay 20% of the value of the home he wants to buy and has a good credit score, he will be able to secure the lowest interest rate on the market.
2. Low monthly payments: By contributing a fifth of the value of the home, the balance is considerably reduced, the amount of your loan is lower and you obtain a preferential interest rate that causes your monthly payments to be not so high.
3. You avoid mortgage insuranceWhether you use the government’s USDA, FHA, Fannie Mae, or Freddie Mac loan programs, except VA, or you want to risk getting an unsecured mortgage from a bank or any lender, making an advance of less than 20% forces you to hire a mortgage insurance. This financial product is paid by the borrower throughout the life of the loan while paying his mortgage on a monthly basis. It is an endorsement for the lender in case the applicant defaults on his mortgage.
Even if you occupy the government programs to give a minimum down payment or if you simply qualify for a mortgage with a down payment of less than 20%, your monthly payments for the payment of your loan, added to the payments of your mortgage insurance policy, would cause you to have to make larger payments during the life of your loan (15, 20 or 30 years), which would significantly increase your monthly expenses and your debt-to-income ratio personal.
The larger your initial deposit, the greater the aforementioned benefits you will have, especially the reduction in your monthly payments.
Be careful: the down payment is not the only initial payment on your mortgage
Although saving for years to have the advance of 20% or more for the house of your dreams seems enough, you should consider that the down payment is not the only initial payment you make when applying for a mortgage loan.
Between the Most Common First Time Home Buyer MistakesIt is precisely to give a high down payment and not to contemplate the closing costs. The closing costs are all those payments related to the application of your mortgage such as the use of a home inspector, notarial lawyers and the service of your lender for the opening of your loan. You could pay around 5% of the value of your home in this area.
It is also important that not all your savings go into the down payment, because you will most likely have to make repairs or renovations in your new home.
Finally, you should consider how much house can you buy. Giving the initial deposit and paying your monthly payments are not the only financial responsibilities that you will have from now on when you become an owner. In addition to your regular monthly expenses to cover your needs, you will add costs for property taxes, utility payments, homeowners insurance, homeowners association fees (HOA), among others.
There is a very popular rule among personal finance experts when creating a budget: spend no more than 30% of your income on housing costs. In the case of buying a house, there is the 28/36 rule, which stipulates that your housing expenses should not exceed 28% of your gross monthly income and debt payments, including your mortgage, should not exceed 36% .
Saving 20% for down payment or even more shouldn’t prompt you to send all that money in one down payment. We recommend considering closing costs and the possible need for more funds to meet the next obligations that you will acquire as a homeowner.
Eddie is an Australian news reporter with over 9 years in the industry and has published on Forbes and tech crunch.