How much money do I need for a down payment?
This article is a free resource in the Home Buyer University course offered by Life & Legacy Properties.
Depending on the type of loan you get when buying a home (and also what type of property you are buying), you will almost always need at least 3% of the purchase price for your down payment.
The following three options are most common for home buyers in America":
FHA loans require a 3.5% downpayment.
Conventional loans offer various options at 3%, 5%, 10%, and more.
VA loans offer a 0% downpayment option (VA loans are generally limited to military veterans and their surviving spouses)
Most buyers will need a downpayment of at least $15,000 (3%) for a $500,000 home purchase.
How can I fund my downpayment?
There are three primary ways buyers get funds for their down payment.
1) Personal Savings
Personal savings might include money in your bank account, investment accounts, or even retirement savings (consult a mortgage lender and CPA to understand what option is best for you).
2) Down Payment Assistance (DPA)
There are many down payment assistance programs designed to assist specific types of qualified buyers, including offering gifted funds or 0% loans that don’t need to be paid back until you sell the home years later.
Some DPA programs help first-time buyers, others assist buyers who spent time in foster care, while other programs provide funds or unique loan programs for African American women or Native Americans. They are ever-changing options that often provide in the range of $3,000 to $40,000 in buyer assistance.
A good mortgage lender can provide updated options of some of the best available current programs.
3) Gift Funds
With certain restrictions and proper documentation, a home buyer can receive funds from family members. This might be money gifted from parents or grandparents, or maybe siblings pooling money together for a down payment. The money you use to buy a home doesn’t always have to entirely be your money.
The Risks of a Small Down Payment
While home values historically have always increased over time, home values do go up and down in shorter time frames - sometimes dramatically.
The smaller the down payment, the greater the risk.
A small down payment increases a buyer’s risk of finding himself or herself “underwater,” meaning the homeowner might owe more on the mortgage than the home is worth in its current market conditions (e.g., owing $380,000 on a home that is only worth $350,000).
The Benefits of a Big Down Payment
A buyer putting down a big down payment, perhaps 20-25%, decreases the likelihood of a homeowner finding himself or herself ever owing more on the home than it’s worth in the current market. Swings of that magnitude are possible, but very rare.
A big down payment also lessens the loan amount, which means the buyer can have a smaller monthly mortgage payment.
Set Yourself up for Success
It is up to the homeowner to become educated in the risks and advantages of various loan and downpayment options to set themself up for success in homeownership.
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