Down Payments 101: Everything You Need to Know

When you begin thinking about buying a new home, your first thought may be about the down payment. But what exactly is a down payment and how much do you need? Why are down payments even necessary?

We’ve covered everything you need to know about down payments so you can be better prepared.

What is a down payment?

A down payment is the portion of the purchase price that you pay upfront. Down payments are usually accepted for large purchases for services or items like a house or car. A loan is required to finance the remainder of the purchase price.

How down payments works

Down payments serve as your cash contribution towards a home purchase and is used to determine your loan package.

The amount of your down payment can impact the conditions of your loan. The loan amount is the balance of the final purchase price minus the down payment. The larger your down payment, the less you need to borrow and the smaller your monthly payments. Also, lenders typically offer lower interest rates (which can also decrease your mortgage payments) to buyers with larger down payments because they see these borrowers as being less risky.

Are down payments required?

It depends. There are a few loan types backed by the federal government that doesn’t require a down payment. Otherwise, traditional lenders typically expect buyers to provide a down payment if they need financing.

Minimum down payment requirements

Many first-time buyers assume they have to provide a 20% down payment. While that has long been touted as the ideal percentage, it’s simply the threshold many lenders use to determine whether or not mortgage insurance is required.

The National Associate of Realtors reported the median down payment for all home buyers was 13% and 7% for first-time buyers in 2021.

The minimum down payment varies depending on the type of mortgage you apply for:

  • 0% down: VA loans, backed by the U.S. Department of Veterans Affairs and USDA loans, backed by the U.S. Department of Agriculture’s Rural Develop program, are two mortgage programs that don’t require a minimum down payment. There may be additional requirements of income limits so check with your loan provider for details.
  • As low as 3%: HomeReady and Home Possible are conventional loans that require as little as 3% down. These loan programs aren’t guaranteed by the federal government but follow guidelines set by Fannie Mae and Freddie Mac, government-sponsored enterprises.
  • As low as 3.5%: FHA loans backed by the Federal Housing Administration have varying minimums based on your credit score. If you have a credit score of 580 or higher. If your credit score is between 500 and 579, the minimum is 10%.

How to decide how much to pay

The amount of your down payment is a personal decision based on your financial situation. There are several benefits of larger down payments. First, it will decrease your interest rate, which can save you thousands over the life of your loan. Second, it’ll also reduce your monthly mortgage payment. Finally, if you’re about to put down 20% or more, you can avoid getting mortgage insurance, which can increase your monthly payment.

Smaller down payments come with their own benefits. They can help you buy sooner since it can take several years to save 20%. You’ll also have more money for renovations and repairs, an emergency fund, and other ventures. If you’re worried about needing mortgage insurance, you can ask your lender to drop the PMI once your equity in the home reaches 20%.

Saving for a down payment

It takes time, commitment, and discipline to save enough to put down on a home. Here are some ways you can save for a down payment for your new home.

Down payments are an integral part of the home financing process. They impact the type of mortgage you qualify for, your interest rate, and ultimately how much you borrow. How much you put down is a personal decision and there isn’t a single correct answer. Your loan provider will be able to answer any other questions you have about down payments.

When you’re ready to get the home buying process started, visit us at SummerHillHomes.com to learn more about our new home communities in the Bay Area and our preferred lenders. You can also view available homes, virtual tours, and schedule a private tour.

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