Imagine this: You've found your dream home, and it's time to make an offer. But upon seeing the cost of your down payment on the agreement, your heart sinks. It seems like the idea of buying the house of your dreams is slipping further away.
Because of the COVID-19 pandemic and the spike in unemployment, many have started saving for a home downpayment now rather than later. Unfortunately, buying a home is more expensive than ever, from the down payment to monthly mortgage payments.
But how much money exactly do you need for a home down payment? Keep reading to learn more.
The Traditional 20% Down Payment
When most people think about buying a home, they assume that they need to put down 20% of the purchase price. This is known as the traditional down payment and is typically required for a conventional loan.
With a conventional loan, you'll also have to pay for private mortgage insurance (PMI) if your down payment is less than 20%. PMI is an insurance policy that protects the lender in case you default on your loan.
It typically costs between 0.3% and 1.5% of the loan amount per year and is paid as part of your monthly mortgage payment. That's why you always need to check with your real estate broker for more info.
The 5% Down Payment
Not everyone can afford to put down 20% on a home, and that's where other loan options come in. One popular option is an FHA loan, which is backed by the Federal Housing Administration. With an FHA loan, you can put as little as 5% down on a home, but you'll still have to pay for PMI.
The benefit of an FHA loan is that it's more lenient when it comes to credit score and income requirements, making it a great option for first-time homebuyers.
The 3.5% Down Payment
Another option for first-time homebuyers is a USDA loan, which is backed by the U.S. Department of Agriculture. With a USDA loan, you can put as little as 3.5% down on a home, but you'll also have to pay for PMI.
The benefit of a USDA loan is that it's available in rural areas and can help low-income families afford a home.
The 0% Down Payment
VA loans are another option for veterans and active military members. These loans are backed by the U.S. Department of Veterans Affairs and require no down payment.
However, you'll still have to pay for a VA funding fee, which is a one-time fee that ranges from 1.4% to 3.6% of the loan amount.
How to Choose the Right Down Payment Option
When deciding how much you need for a home down payment, it's important to consider your personal financial situation. You should also factor in the costs associated with buying a home, such as closing costs, home inspections, and moving expenses.
Additionally, you'll want to make sure you have enough money saved for a rainy-day fund in case of unexpected expenses or job loss. It's also important to consider the total cost of homeownership, including property taxes, insurance, and maintenance costs.
Make Your First Home Down Payment Now
The amount you need for a home down payment on your home purchase varies depending on if you're a first-time home buyer, if you meet the requirements for a government loan, and the total cost of your home.
Typically, you'll need anywhere between 3%-20% of the purchase price for a down payment, so save up and understand your financial situation to determine your best option. Take action now to plan ahead and get ready to make that purchase!
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