Did you know that your down payment is one of the most essential parts in buying a home?
Let’s start with lenders.
Most lenders today deal with conventional financed loans. This means that they require some down payment before they approve the mortgage, which always ranges. It can rise and fall, depending on different factors such as credit, income, and the specific lending program involved.
The Average Amount
According to the MortgageCalculator.org, the benchmark figure for a down payment is 20% of the actual home value. To make financial matters a little more unpredictable, the Home Buying Institutes estimates the range for an average down payment to be between 0 to 20%. Unfortunately, there are no official stats that show the average down payment of homes these days.
For individuals with bad credit, lenders may ask for a larger down payment or upfront fee. It could even surpass the 20% mark. In fact, according to the MarketWatch, those who have a credit score of 660 to 680 can have lower down payments. If the score is even lower than this mark, there is a strong chance that the required amount will increase. Needless to say, if the down payment is bigger, the terms are shorter and the interest rates are lower.
For those with a great credit score, there is good news. The interest rates are lower, and for some, lenders will even ask for a smaller amount on the down payment. How do you get a lower down payment? Well, you can agree to pay the mortgage insurance, which protects the lenders in case you default on the loan. But the downside is that monthly loan payments may increase. However, lenders often remove the insurance once 20% of the loan is paid.
How to Save
Saving money can be hard to nearly impossible, but with a goal in mind, you’ll be able to note how much to save and for how long. Yahoo Finance suggests that you determine 28% of your gross monthly income, the amount recommended for the entire house payment, which includes the principal, interest, taxes, mortgage and home insurance, etc.
Most of you are probably confused as to how much you should save for the down payment on a new house, or what kind of down payment to take. There are actually several options, and each of these comes with pros and cons. However the best choice would be a family loan or a gift, giving around 20% of down payment. Through this, private mortgage insurance will be avoided, which always comes with an added fee, especially when you borrow about 80% of the home’s value.
But a gift will always be better than a loan. A family loan will somehow be counted against you when it comes to debt load. It will make it more difficult for you to avail or qualify for a mortgage. Yet when it’s a gift, it will not count. But of course, gifts should always be documented, particularly the source the gift. An example for this is a parent’s account.
As for a loan, proper documentation should be noted. The term or length should be at least 5 years and there should be a payment schedule. A minimum amount of interest should also be charged, to keep it from being a gift, according to the IRS. As of the moment the rates are quite low. In November, the rate was just around 0.89% annually for a loan term of 9 years.
Whether you’re saving or thinking about saving, the previously mentioned items might end up saving you from some financial stress and lead you to your dream home!