Everything You Need to Know About Down Payments When Purchasing a Home

What Is a Down Payment?

A down payment is merely the upfront payment a home buyer pays to secure the amount borrowed. Some lenders require a down payment of at least 3% to 20% before approving you for a home loan.  However, the requirement and cost are dependent on your credit score, the home value and the mortgage type. Keep reading below in order to fully understand how mortgage and down payments work.

Why Mortgage Lenders Require A Down Payment

The reason is quite evident. Mortgage lenders typically require a down payment in order to protect themselves in case of a default. It would ensure they don’t go at a loss, especially in the early years when the homeowner owes more. The lender wants to avoid this circumstance, and that is why a down payment is the only route to ensure such doesn’t happen.

If by any means you purchase private mortgage insurance, the down payment will drastically drop to 5 or 10% of the home purchase price. (

How Big of A Down Payment Do You Need?

How big or small the down payment depends on numerous factors, including the mortgage program, the type of property, and the price of the home. Another factor that might influence a house down payment is the credit score and the type of lender.

Before you make your down payment, you need to analyze your financial situation, that way you don’t find yourself at wit’s end. You don’t want to put down too much and find yourself financially strapped. However, if you can afford a more significant down payment, it may help you to qualify for a better interest rate, therefore a lower monthly mortgage payment.

In some instances, lenders might refuse to lend if the down payment is too low. That is because it might be too risky in case of a default. But with some governmental programs like VA, FHA and USDA loans, the government can reduce this risk by guaranteeing some portion of the loan.

To find out how much your down payment might be, you should use a mortgage calculator to see the down payment’s effect on the monthly mortgage payment. Once you have an idea of how much your down payment might be, shop around for the best deals offered by lenders.

5 Tips for Saving Up for Your House Down Payment

Irrespective of the amount of the down payment, you still need to come up with a plan. Here are a few tips that will help you save up for your down payment:

Open A New Savings Account

One tip that often works for homebuyers is to open a new bank account specifically for your down payment. You shouldn’t use this account for any other purpose than saving your down payment. That is where you will need to exercise discipline.

Dedicate any Extra Income To Your Down Payment

With a savings account, you can push in some funds from your monthly income. That way, you will be able to save without hurdles. Put any bonuses, cash, and gifts away for your down payment.

Remove Temptations

If you subscribed to some marketing newsletters or magazines that often compel you to spend, now is the time to unsubscribe until you’re ready for such spending. If you are a big shopper and often go to the mall, you may want to find other activities and hobbies to keep you from spending as much. Doing little things like these removes extra temptations and helps keep you on track towards saving up for a down payment.

Sell Items You Don’t Need

There’s a lot of stuff you probably don’t need anymore. Instead of taking up spaces in your home, why not sell them off? Through this, you will be able to make some more money for your down payment. With the new savings account created for your down payment, you will be able to beat the mark before you could even say, Jack Robinson.

Think Before Spending

When thinking of saving a down payment, you need to take your spending in context. Before you spend, you first need to determine if you actually need the item or if you are merely impulse buying. Extra expenses like shopping for movie tickets or clothes may need to be on hold until you settle your house down payment.

What Does it Mean When Your Lender Asks You to “Prove the Source of Funds” for Your House Down Payment?

When buying a house, one of the challenges you might face is saving enough for a down payment. The only situation where you won’t need to worry yourself is when you qualify for a program that requires no down payment. Aside from that, you probably will not only need to have the down payment but you will also need to ‘source‘ or prove where your down payment is coming from. Here are familiar sources you may utilize for the settling of your down payment:

Gift Funds

You might be lucky enough to get gift money for your down payment. A lot of mortgage programs allow this kind of cash. However, be sure to work closely with your lender when taking this path to ensure you don’t make any mistakes. Gift Funds typically have to come with a letter, stating that the money is a gift and that repayment is not required. Your individual lender will need to tell you what restrictions apply.

Local Programs

There are a handful of government programs that help potential homeowners fund their down payments. Most of the time, these programs are only for individuals with moderate incomes and come with a list of requirements like attending homeowner education classes. If you are interested in taking advantage of these programs you will want to apply as early in the process as possible and consult a licensed home loan consultant.

Retirement Assets

For many individuals, this might not be an option. But for some, it is one of the best sources you can use to finance your down payment. If perhaps you’re borrowing from your 401k account, this means you will put a 20% down payment. It would lead to a low monthly fee, a situation that would benefit you much. At some point, this option might get a little complicated. In that case, make sure you have your financial adviser beside you.

Your Employer

Another source of funds for your down payment is your employer. Many government or educational institutions often assist their employees by offering down payment and home-buying assistance programs. If you’re a new employee and you’re from another city, the company you’re working with may be able to offer you some benefits regarding housing.

Savings

This source is the most reliable and requires you to save a certain percentage from your monthly income over time to make a house down payment. Saving will help you cut down on expenses but can require more discipline than you are used to. You might need to make some adjustments, like prepping your lunch at home instead of takeout or temporarily canceling a gym membership and streaming services. By making small adjustments to your lifestyle, you will be able to save money in no time for your home down payment.

How to Easily Calculate Your Down Payment

You don’t need to be Einstein to calculate your down payment. There are numerous integrated down payment calculators on the internet that you can use to pull this off. Take note of what determines your down payment options, your credit score, location and mortgage value.

Saving for a down payment is not always a pleasant experience. But by knowing the mark, you will feel motivated to hit it and move into your dream home. Remember, it is all about persistency and small victories. With that, you’re ready to go. So, don’t forget to do some quick calculations to determine how much the down payment might be on that big, beautiful home you’re looking at.

Check out our mortgage calculator:

What is a house down payment calculator?  

A down payment calculator is a plugin, widget or script embedded on a webspace for easy calculation of down payment amounts. There are numerous down payment calculators, with various features and functionalities. Some calculators allow you also to include taxes. These calculators would be able to help you determine your down payment amount, which would help you plan.

There are different types of mortgages and knowing what to expect from these various lenders will help you make a decision. The regular 30-year fixed challenge comes with a mere 5% down payment, while the FHA mortgage comes with a 3.5% down payment. Another type of mortgage is VA loans, which is Veteran’s Affair loan offered only to U.S military members with zero down payment. However, know that the VA and the USDA don’t make the loan; they are just guarantors that assumes part of the risk in case of a default.

Final Thoughts!

Down payment doesn’t have to be a hard nut to crack, nor do you need to break the bank. All you have to do is explore the various ways to source for finance. Making some significant adjustments to your lifestyle is a little price to pay for your dream home. Furthermore, knowing your down payment amount would help set an achievable target. Numerous down payment calculators would help do the calculation. You don’t need to be Albert Einstein to know your down payment amount. So, shop for a mortgage and secure the best deal for your circumstances.

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