How Much Down Payment do you Need to Purchase a Home?
At Jonathan Torres and Torres Mortgage Team, we often get asked how much borrowers should put down on a home.
There isn’t a one-size-fits-all answer, but borrowers should consider many factors when choosing their down payment.
Keep reading to learn what you should consider when choosing your down payment.
What is a Down Payment?
A down payment is your investment in a home. It’s the money you put toward the purchase price, while the mortgage financing takes care of the rest. You’ll usually see down payments as a percentage of the sales price, such as 5%. If you’re buying a $200,000 house, a 5% down payment would be $10,000.
Think of your down payment as a stake in the property. It reduces lenders’ risks because you’ve invested some of your own capital in the property. If you don’t make your payments on the house, the lender can foreclose on the home, and you’d lose the money you invested.
What are the Minimum Down Payment Requirements?
Each loan program has different minimum down payment requirements. The Torres Mortgage Team works with lenders with many different down payment requirements.
Some loans, such as VA and USDA, don’t require a down payment. You can borrow up to 100% of the sales price. However, VA and USDA loans are only for specific demographics, such as veterans of the military or low-income families buying a home in a rural area.
Conventional loans require down payments of 3% – 5%. If you’re a first-time homebuyer, you may qualify for a 3% down payment; if you’ve owned a home before, you’ll need 5% down on it.
FHA loans require as little as 3.5% down, but you must have at least a 580 credit score. However, if you have a score between 500 – 579, you may need a 10% down payment.
Finally, jumbo loan borrowers or anyone borrowing more than the current conventional limits ($647,200 in 2022 and $726,200 in 2023) may need as much as 20 – 30% down on the home.
Does any Loan Require a 20% Down Payment?
You’ve likely heard that a 20% down payment is required to buy a home. It’s not a strict requirement, and most lenders don’t enforce it, but there are pros and cons of making a 20% down payment to consider.
A 20% down payment is what most people consider when buying a home; here are the benefits of it.
- No PMI
If you borrow a conventional loan, you’ll pay Private Mortgage Insurance until you owe less than 80% of the home’s value. Then, with a 20% down payment, you bypass PMI and lower your mortgage payment.
If you don’t make a 20% down payment, you can request PMI cancellation once you owe less than 80% of the home’s value.
- More attractive rates and terms
The more money you invest in the home, the less risk a lender takes. You may get quoted better rates and terms with more money invested. The Torres Mortgage Team works with lenders with competitive rates, but any factors that reduce your risk can help you secure the most competitive terms.
- Lower mortgage payments
The lower your loan amount, the lower your mortgage payment will be. Investing money upfront means you need to borrow less from the lender. This lowers your mortgage payment and frees up your monthly income.
A 20% down payment isn’t required and has some downsides you should consider.
- It takes longer to save
A 20% down payment means saving $20,000 for every $100,000 in the purchase price. However, this could take you much longer to save, leaving you renting for longer. The Jonathan Torres and Torres Mortgage Team can help you determine which makes the most financial sense.
- Reduces your savings
Buying a home is a large investment. If you tie up all your liquid assets in the house, you may not have an emergency fund or money to handle home repairs, home furnishings, or other necessities. Therefore, depleting your savings may not be the best tactic when buying a home.
- Low liquidity
You can sell a home after you buy it, but it won’t happen overnight. Putting all your eggs in one basket, so to speak, isn’t the best idea. Instead, you may want to make a lower down payment and invest the remaining capital in other investments.
How to Determine How Much to Put Down on a Home
So how do you determine how much to put down on a home?
No two borrowers will have the same situation, but here are some questions to ask yourself:
- What monthly payment can you afford?
Your down payment affects your monthly payment. The more you put down on the home, the lower the payment. Find the perfect balance between leaving some savings and having a manageable monthly payment.
- Do you have enough for closing costs?
Your down payment isn’t the only cost; you’ll also have closing costs. This increases the cash needed to close. Check your budget to see how much you can afford to put down on the home while also covering your closing costs.
- How much money will you keep free?
Don’t tie up all your money. Instead, keep some funds free so you can handle your emergencies and other needs around the home.
Your down payment is an investment in your home. It remains in the house until you sell it or refinance. Therefore, consider how much you put down on the home, looking at all factors, including liquidity, mortgage payment, and loan requirements.
At Jonathan Torres and Torres Mortgage Team, we have many options for different down payment options. Contact us today to discuss your financial situation and potential home purchase plans. We’ll help you understand your options and choose the one that suits your financial needs. Your home is one of the most significant investments you’ll make; let us help you make it a good one.