As a well-qualified borrower, you have options when deciding how much you should put down on your first home. So how do you decide?
There are a few things to consider when making this decision, and we’ve laid them out for you here.
What is a Down Payment?
When you apply for a mortgage, the terms of your loan will vary based on many factors, and one of those is down payment. Your down payment is calculated as a percentage of the value of the home you are buying. For example, a 20% down payment on a $300,000 is $60,000.
For a long time, 20% was the standard minimum down payment. This number may be intimidating to you as a first-time home buyer, despite being a well-qualified borrower with excellent credit, a low debt-to-income ratio, and sufficient, verifiable income.
The good news is, down payments now start at just 3%, and in some cases, you may be able to borrow the down payment to make your initial investment nothing more than closing costs.
An FHA loan is a loan insured by the Federal Housing Administration to protect lenders. This program allows lenders to offer a mortgage with as low as a 3.5% down payment.
Keep in mind that Private Mortgage Insurance (PMI) is standard until 20% of the principal has been paid or until there is 20% or more equity in the home. The PMI payment will vary, but is generally between 0.5% and 1.8% of the loan total each year.
This type of financing is particularly popular with first-time home buyers because it has a more lenient credit score requirement and allows borrowers to keep more cash in their pockets when investing in real estate for the first time.
Conventional loans are what most people think of when they hear the word “mortgage.” With down payments as low as 3%, there are a wide variety of terms for a conventional loan.
The best terms are offered to those with excellent credit. Generally speaking, conventional loans will work for those with a debt-to-income ratio lower than 43% and a credit score above 620.
Conventional loans will also require PMI until the borrower has paid 20% of the principal or has 20% or more equity in the home.
If you have served in the military, you are likely eligible for a VA loan, backed by the US Department of Veteran Affairs.
VA loans offer many benefits, including 0% down and no mortgage insurance. This can make buying a home attainable no matter your cash reserves. You’ll also enjoy protection from prepayment penalties and exceptionally attractive terms because lenders are protected by the US Department of Veteran Affairs.
If you qualify for a VA loan, it is almost certainly the best choice for you.
A USDA loan is another option that will require 0% down. These loans are backed by the US Department of Agriculture to stimulate rural housing economies.
USDA loans are available to borrowers who make 15% above the median income or less and are looking to buy a home in a rural area. This is generally defined as a place with a population of 20,000 or less, but if you have a specific town in mind you can find out if it qualifies here.
A USDA loan is offered to those with credit scores of 640 or above and a debt-to-income ratio lower than 41%.
What’s Right for You?
The best way to decide what’s right for you is by working with an expert. Contact me today to talk about the types of mortgages on this list that may be right for you, and one of our experts can help you decide how much you should put down on your first home.