5 Things to Know About Making a Down Payment on a Home
The down payment on a home is one of the biggest expenses that home buyers will make, as down payments can range anywhere from 3.5% to 20% of the cost of the house. Unless they are planning to get a loan that does not require a down payment or plan to pay in cash, homebuyers who want to purchase a home will need to prepare to make a down payment. The following information can help homeowners get ready to make a down payment on a house.
Who Doesn't Have to Make a Down Payment?
There are two common types of loans that do not require a down payment: VA loans and USDA loans. VA loans are only an option for homebuyers who serve or have served in the military. USDA loans are for homebuyers who would like to purchase property in a rural or suburban area. A home buyer who is unsure whether they qualify for a VA loan or a USDA loan should check with a reputable lender before moving forward with the home buying process.
In some cases, homebuyers can receive seller financing and may be able to avoid making a down payment. However, seller financing is not a common arrangement, as many sellers are just as likely to want a down payment from the buyer as lenders.
How Much Is the Down Payment?
The down payment can range from about 3.5% to 20%, depending on the type of loan. Most conventional mortgages require a 20% down payment, or the buyer must pay private mortgage insurance, which can increase the monthly payment.
How to Budget for a Down Payment
Homebuyers who are budgeting for a down payment on a home should start by determining how much they plan to spend on the home they want to buy. Additionally, they will need to know what type of loan they plan on using. To determine this, they will need to speak to a qualified lender to find out what kind of loan will fit their needs.
Finally, the home buyer should then calculate how much they can afford to save each month until they have enough money to make a down payment. Homebuyers should remember that closing costs represent a different expense and must be saved for separately. Usually, closing costs are between 2% and 5% of the purchase price of the house.
What Are Common Down Payment Sources?
The needed cash for a down payment must be tracked, and the source or sources of funding must be acceptable to your lender. FHA, Fannie Mae, and Freddie Mac's requirements may vary slightly, and private lenders also have stipulated sources of funds that you must be able to comply with.
Commonly allowed sources include checking and savings accounts, stocks, and bonds, IRAs or Keogh Plans, 401K or trust accounts, and any funding that represents the cash value of a life insurance policy.
In addition, gift funds can be an acceptable way to fund the down payment. Still, there may be limitations, and you will have to identify the source and amount of any monetary gift and attest that it is a gift rather than a loan that must be repaid. Be sure to check details with your lender when you begin the application process.
Contact A Reputable Lender
Before getting started with the home buying process, it's important for buyers to contact a reputable lender who can inform buyers if they need to make a down payment for their upcoming home purchase. Once buyers know how much money they'll need to save to buy a home, they can get started with the down payment saving process.