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You might have heard that to buy a house, you’ll need to make a down payment of 20% of that house’s price. If you can afford it, putting more money down has many benefits. However, it’s expensive and it’s not the only way to buy a home. Don’t let misconceptions about what you can afford to keep you from finding the home you want. Knowing how to save for a down payment will allow you to make your dream home a reality.
To help you understand your options, we dig into the details of how to save for a down payment.
How your down payment affects how much house you can afford
When you purchase a house with a mortgage, you’ll likely need to contribute a down payment at closing. The down payment is your stake in owning the home. The lender has a stake in the property when they loan you the money to purchase it.
Most mortgages require a down payment, except for those such as a VA loan*, which is backed by the federal government.
Down payments can range from as low as 3% to as high as 20% of the price of the home. If you want to purchase a $200,000 home, the down payment could be between $6,000-$40,000, depending on your loan.
*VA loans subject to individual VA Entitlement amounts and eligibility, qualifying factors such as income and credit guidelines, and property limits. Fairway is not affiliated with any government agencies. These materials are not from VA, HUD or FHA, and were not approved by VA, HUD or FHA, or any other government agency
A higher down payment can lower monthly mortgage costs
Typically the more you can put down, the cheaper your monthly mortgage payments will be. Proving up front that you can handle the expenses of owning a home helps to show a lender that they’re not taking on a high risk by approving your mortgage. With less risk, you’ll likely get better terms for your mortgage.
You’ll also pay a larger amount of the overall price of the home up front, lowering the balance of your mortgage overall, which also lowers the monthly payments and increases the amount of equity you have in your home immediately.
You can get a house without having a large down payment
A down payment of 20% is not always required, depending on your lender, credit history, and eligibility for various types of loans, such as:
- FHA loans, which require as little as 3.5% down because they’re backed by the Federal Housing Administration.
- VA loans, which don’t require a down payment, as they’re backed by the U.S. Department of Veterans Affairs.
- Some conventional loans, which require as little as 3% down, following guidelines set by Fannie Mae and Freddie Mac.
Putting a lower amount down, however, means you may take on higher monthly mortgage payments to cover the lender’s risk and the remaining price of the home.
This includes mortgage insurance premiums for FHA loans or private mortgage insurance for conventional loans. Insurance allows homebuyers who can’t make a large down payment to get an affordable mortgage, while protecting lenders from the risk and costs associated with default and foreclosure.
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Nail down your plan for making a down payment
How much will you need to pay?
A loan officer can help you understand what you’re eligible for and what specific down payment requirements you’ll need to meet.
Use our mortgage calculator and affordability calculator to see how your down payment amount affects the monthly mortgage payments.
Assessing your overall budget can help you narrow in on what is affordable for a down payment. Your budget will need to include the price of the home and interest rate of the mortgage, mortgage insurance, property taxes, homeowners insurance, any homeowners association fees, and money for home maintenance and emergencies.
What is your timeline for paying it?
If you’re actively searching for a home, the opportunity to make an offer on a property can pop up quickly and you’ll want to act fast to secure a home you like. Being pre-approved for a mortgage helps you understand how much money you can put down.
Once your offer has been accepted and you’re working toward closing your mortgage, discuss with your loan officer when exactly your down payment will be due and how it will be paid at closing.
If you haven’t started searching for a home, consider what you can afford currently, compared to what you could afford if you had more time to save for a down payment. This will help you decide a realistic timeline for not only finding the home you want, but also knowing you can comfortably afford it.
Fast ways to save for a down payment on a home
- Gifts can often be used for a down payment if specified with the lender. They can come from family, a spouse, or partner who lives with you.
- Use your investments. You might be able to borrow from your retirement plan with penalty-free withdrawals for buying a home. Look into your investment accounts to learn whether there are opportunities to use this money now, instead of waiting for retirement.
- Set savings aside each month into a designated savings account.
- Save tax returns and bonuses for your future home.
- Improving your credit score could improve your future mortgage terms.
- Increase your income to make it easier to afford your current expenses while saving for a future home.
- Lower your expenses so that you can save more of your money. Start by paying down high interest debt, which will save you interest costs and can improve your credit score.
What do you need to do to afford a down payment?
A loan officer can help you understand how to improve your credit score, how to save for a down payment, where to find assistance, and your eligibility for various loan options.
Contact us today to discuss recommendations for your specific situation.