When you are buying a house for the first time it is hard to determine how much you will need stashed away. There are two main things that you will have to save for in advance when buying a home, the down payment and the closing costs.
Let’s talk about the down payment. First off, what is a down payment? A down payment is the equity you put into the home at the time of purchase. This means it is the amount of the house paid for out-of-pocket that is not financed by the lender.
Depending on your financial situation you can contribute either a higher or lower down payment. However, you must keep in mind certain mortgage types require a minimum percentage of the home price for the down payment. Some minimums include:
- 3% – Traditional mortgage*
- 3.5% – FHA loans*
- 0% – First Time Homebuyer* (Must meet qualifying requirements)
- 0% – VA loan* (Must meet qualifying requirements)
- 0% – USDA loan* (Must meet qualifying requirements)
Both large and small down payments can have their benefits and draw backs.
Large down payments, equal to or over 20%, allow the buyer to avoid paying for Private Mortgage Insurance (PMI). This is an added cost that is tacked onto your mortgage payment until you have reached the 20% equity point. Larger down payments also:
- lower monthly mortgage payments
- lower amount paid towards interest
- increase amount paid towards principal
- might make it easier to qualify for a mortgage
The downside of the larger down payment is that you have less cash on hand. This means that you are more vulnerable to unexpected and unplanned expenses. The only way to get your equity back out of your house is to either sell it or apply for a Home Equity Loan (HELOAN) or Home Equity Line of Credit (HELOC), which can take time to process. This can leave you in a pinch if you drain all your savings to afford the higher down payment.
Smaller down payments mean that you will keep more money on hand. This can allow for the buyer to:
- make repairs to the house
- keep a larger emergency fund for unexpected expenses.
However, this can lead to:
- paying for PMI on your mortgage
- higher monthly payments
- paying more in interest
Saving for your down payment is no easy task. For example, if you purchased a $300,000 house, a 20% down payment would be $60,000 and a 3.5% down payment would be $10,500**. Saving $60,000 can take a long time and for some people it is just not an option. However, putting 20% down on a mortgage can be attractive to some sellers because it shows the buyer is more likely to qualify for the mortgage. This does not mean you will not be able to get a house with a lower down payment, it just means it might take longer to find the right home.
It can be difficult saving up enough for the down payment, so make sure to learn about all your mortgage loan options and find the best option that works for you.
The housing market in 2021 for Boston Massachusetts is seeing an average down payment of 21.11% and 71.68% of buyers have credit scores of 720 or higher, according to a study done by lendingtree. This means that the market is extremely competitive for buyers. Click here to read their full article.
Good Luck House Hunting!
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*These minimums are not a representation of what a buyer will qualify for when applying for a mortgage. They are generalizations of the program and specific requirements may apply to qualify for them. They are also subject to change.
**These numbers are used for illustrative purposes only and in no way represent what a buyer will qualify for or pay when applying for a loan.