What is the Requirement for a Down Payment on a Home?
We’ve found the perfect house, and interest rates are still low at just under 4%. We have been preapproved for the loan needed to purchase the home and have given the seller earnest money for the escrow account. The next step? Acquiring a down payment.
What is a down payment?
A down payment is the money given to the seller of the home you are buying. It is a percentage of the total price of the home. The remaining amount is paid to the seller from the mortgage secured.
The money for a down payment can come from:
- Your personal savings account
- The sale of a house
- Gifts and grants from family, employers and nonprofits
Why is a down payment required when purchasing a home?
Lenders require a down payment because it gives the borrower incentive to make their monthly mortgage payments. If you as a homeowner can’t make the monthly mortgage payments on your home, you risk losing the down payment and going into foreclosure.
What is the minimum amount required to put down on a home?
For a while now, 20% has been the minimum down payment for standard loans. While a down payment of 20% or more allows you to avoid purchasing mortgage insurance, down payments less than 20% are becoming more common.
Because the housing market is improving, lenders are relaxing. Even 10% down payments are more widely accepted. That’s good news for all who need to buy a Brooklyn home.
Most lenders require at least 3% down. Mortgages insured by the Federal Housing Administration (FHA loans) require at least 3.5% down. Minimum down payments of 5%, 10%, 20% or more are determined based on your credit history, the type of dwelling and your reason for buying.
For the sake of explanation, look at these two examples. Let’s say you buy a house for $300,000:
- A 20% down payment means you pay the seller $60,000 and borrow $240,000.
- With a 10% down payment, you would pay the seller $30,000 and you would borrow $270,000.
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Are there risks associated with down payments less than 20%?
Yes, if you can call them risks.
- In order to qualify for a down payment less than 20%, you’ll need a credit score “in the green.”
- You’ll have to but mortgage insurance, too. (Mortgage insurance protects the lender in case you default on the loan). There are two main types: Private mortgage insurance (PMI) and FHA insurance.
- Lenders usually charge fees to borrowers who make down payments of less than 20%. The fees are on top of mortgage insurance premiums. The smaller the down payment, the higher the fees. Fees are paid at closing. Lenders sometimes charge higher interest rates instead of the fees.
When a down payment of 20% or more is put down on a home, the lender figures defaulting will be more detrimental to you than it will be to the bank. (This calculator will estimate the cost of mortgage insurance in your case.)
Because home values are improving, home prices are increasing. However, most economists predict they will not increase rapidly. Putting 10% down rather than 20% will make gaining equity in your home take longer. This matters only if you want to apply for a home equity line of credit in the future. You’ll have less to draw on.
Depending on your situation, 10% down may prove to be worth the complications that come with that. To make sure you’re making the right choice, talk with your lender. Discuss fees and factors that come with different sizes of down payments. (i.e, 10% versus 20% down as mentioned above).
In closing …
A bigger down payment equals more house. Again, talk with your lender. If you can, put 20% down. If you can’t, look at many different sizes of down payments and how each amount will affect your monthly house payments. A good lender will get creative and work with you to get you into your next home.
If you have questions about down payments, contact Charles D’Alessandro, your Brooklyn real estate agent with Fillmore Real Estate at (718) 253-9700 ext. 206 or email [email protected]. He’ll answer your questions or connect you with a great person who can. Call him today!