How a Down Payment Affects Your Mortgage
Buying your first home is exciting and maybe a little scary at first. Thoughts like “What loan should I get?” or “What should my down payment be?” and “How much home can I realistically afford?” start creeping in, which bring you back down to reality. Not knowing the answers to those questions can make the process feel overwhelming. But don’t worry; once you start figuring out how much you need to save and which loans you’re able to get, you’ll feel much better about the rest of the home buying journey.
Why do you need a down payment anyway?
Basically, a down payment is money that you will pay out of pocket for the home you’re interested in buying. It also shows lenders, such as Atlantic Bay Mortgage Group, that you’re capable of saving money — a lot of money at that — and it demonstrates that you’re serious about this investment.
A down payment is not the only thing that affects your mortgage rate. Things like credit history, income, and current debt affect it too.
Down payments help take the risk off the lender by building trust between you and them, and they reciprocate by giving you better credit terms. So, if you put more money down, there’s a better chance of your monthly payments being lower than with a low down payment.
Does every loan require you to put something down?
Not always. For example, the VA loan requires no down payment in most cases, but it’s only for veterans and spouses of veterans, active duty military, Reservists, and members of the National Guard. If you’re looking to move to a more rural area and have a low-to-moderate income, there’s the USDA loan. For most other loans on the other hand, some down payment is required. The FHA is a low down payment option, and it’s great for those who have not-so-perfect credit. VA, USDA, and FHA are government-insured loans, which means that the U.S. government refunds a portion of a mortgage back to the lender in case you default on your payments. This puts lenders at ease.
What's the minimum you should have saved?
Conventional loans, sometimes known as regular loans, typically require a down payment anywhere between 3% and 20%. Anything lower than 20% requires you to pay private mortgage insurance, so that’s an increase in your monthly payment to consider when saving for a down payment. Based on your income, credit, and state that you live in, you could qualify for grants and down payment assistance programs that a lender could walk you through.
Does a bigger down payment really equal more house?
Not exactly. This all depends on whether or not you meet all of the other requirements when applying for a mortgage. For example, if don’t have a job, then you won’t qualify for a mortgage, even if you have $100,000 saved for a down payment. It helps to decide how much you can afford and save by looking at your debt-to-income ratio (DTI). Because let’s face it, more than likely you have other expenses every month aside from a mortgage payment, like a car loan, student loan, child support, etc. Start by choosing an amount you prefer not to exceed each month on debts. Then combine all of your current debts and expenses plus your potential mortgage payment. If you’re uncomfortable with that amount, you should consider looking for less house, even if you have a lot saved.
How much you put down, with all other criteria met, will affect how much you pay each month on a mortgage for the next 15-30 years.
So, if you’re saving up for a down payment, keep in mind that ideally at least 20% down will help you get the house you want and avoid other fees, as long as you meet the other requirements such as income, credit, etc. You can also put less than 20% down, but keep in mind you will have mortgage insurance premiums if you do so, which may still fall into a monthly payment amount that you’re comfortable with. Finally, if you’re having a difficult time saving for a down payment, speak with a mortgage banker about potential grant and down payment assistance programs.