Scotty and Melissa, two would-be homeowners, called me up the other day to ask me about how big their down payment should be. Everything they had read or been told about the size of the down payment they should have seemed to be in conflict with everything else.
But like every potential homebuyer out there, this couple needed to know how much they should have as it would be a deal breaker for them in buying their first home if they didn’t have enough.
How Big Should Your Down Payment Be?
They had heard that a down payment could be as much as twenty percent and as low as five percent, and that the more that is paid down on the home, the lower the monthly payments. They had also heard that some loans are written with a down payment of just three-and-one-half percent, while some loans require no down payment at all. Well all of that’s true. But the type of loan that the couple goes for, however, will actually determine how much they need to pay down.
There are three down payment strategies for homebuyers to consider. You can start on the low end of the down payment scale with a loan like the FHA loan that requires a low down payment but will have higher mortgage insurance costs. You can go for the mid-range down payment, such as a conforming loan that requires a five to ten percent down payment but lower PMI costs. Or you can go “all in” and take out a loan that requires a down payment of twenty percent and eliminates the need for mortgage insurance altogether.
For example, if they go for a government loan, like a VA loan or FHA loan, they might qualify for that super low down payment. There are also loans out there known as non-conforming loans, and they can require that you pay a whopping twenty percent down. Let’s take a look at some of the different types of loans out there, and determine how much most homebuyers will need to save as a down payment for each loan.
FHA Loans Can Help If You Have A Small Down Payment
FHA loans are loans are excellent for folks without a lot of money to pay down. The minimum down payment is just 3.5 percent of the amount of the mortgage. There is, however, a cap on the value of the home that you can purchase, and that cap is based on where you live at. The cap was put into place because the cost of home prices is so different across the country.
For example, the cap for Danville CA in Contra Costa County is $729,750, while the cap for Fairfield CA in Sonoma County is slightly less at $662,500. That’s a huge difference. One of the best things about FHA loans is that anyone can apply for one, regardless of their income level. After all, just because you have a higher income does not necessarily mean that you have saved for a large down payment.
For veterans of the military, a VA or Veteran’s Administration loan is oftentimes the best option. For eligible vets, there is a zero down payment option that allows vets to borrow 100% of the home’s price, at least for homes that are priced at $417K or less.
While affording a down payment is an obstacle for some buyers, others may have the cash but should weigh their options before deciding which strategy is best for them. The bottom line is not to overextend your cash reserves, since there are a number of hidden costs that come along with owning a home, like paying for repairs, homeowner’s insurance and taxes. This can make being a homeowner a bit pricier than you had bargained for – and you may wish you had some of that down payment back. Your realtor and loan officer are great sources for information about how big your down payment should be.
This guest blog was provided by Vickie Nagy, a San Ramon California Realtor. For more information about Vickie, you can head over to her Homes for sale Danville, CA website where you have access to all Homes in Dublin California.