Essentially, the minimum down payment (Add the link to the 30 30 3 article.) on a house is largely up to you and the lender you partner with. Since a down payment is the portion of the property value you pay as a lump sum at the beginning of the home-buying process, the amount you put down will affect many other variables throughout the life of the loan. Considering the fact that these borrower funds provide the upfront investment and commitment to homeownership, it is essential to plan your investment funds with your long-term goals in mind. Let’s answer your initial question first.
What is the minimum down payment for a house?
Although there is no single standard for down payments, a good rule of thumb is 30%.
Now let’s talk about your options and why you may want to invest more or less, depending on your future plans.
What is the average down payment?
Essentially, the best rule of thumb is 30 percent of the property value as your down payment; however, a good lender can help you find alternate options if you are close but need some help with a down payment. Add a link to the How to Buy a House With No Money article.) There are options to help with your initial investment, such as; down payment assistance programs, gifts from family or friends, government-backed assistance, and many other alternatives to saving 30% on your own.
Do you qualify for government-backed assistance?
Two of the most common government-backed loan options are VA and USDA. The U.S. Department of Veteran Affairs offers zero down payment loans for those that qualify for military service eligibility.
Additionally, the U.S. Department of Agriculture offers USDA loans for farmers and ranchers if you are interested in rural living. These real estate loans are designed for people wishing to become homeowners in rural areas with very low populations. Be sure to ask your lender if you qualify for closing cost assistance and other benefits for this homeownership category.
Is this your first home?
Given the many options for down payment assistance for first-time homebuyers, you should capitalize on mortgage programs to help you achieve your dream. Freddie Mac, Fannie Mae loans are government-backed by the Federal Housing Administration (FHA). They offer many loan programs for first-time buyers. FHA loans are widely used and require higher property standards for approval. Overall, the structured process for approval with FHA loans will ensure your property is safe, secure, and sound to occupy, making this loan ideal for newbies.
How strong are your personal finances?
One crucial factor in the home-buying process is providing proof that it will be very unlikely that you will default on your loan. For this reason, you will need consistent work history, financial stability, and records of financial responsibility. Lenders want to see that you have maintained timely credit card payments and a credit score of 620 or higher (in most cases). Correspondingly, lenders rely on financial stability and your credit score to determine your interest rate.
What type of mortgage do you want to use?
Every loan will come with its own loan terms, loan limits, and specifications. Conventional mortgages Add a link to conventional loans requirements and benefits.) are the most common type of mortgage. Simply put, this is a type of loan that you personally guarantee with good credit, solid work history, and your own money. The bottom line is that there has to be a sizable guarantee put in place to protect the lender in case you default on your loan. A traditional conventional loan requires a 20% down payment that secures the bank’s investment. (That being said, there are exceptions to this rule.)
Alternatively, non-conventional loans help borrowers who do not meet the criteria for loan approval. Many of these borrowers have lower credit scores, a history of bankruptcy, are self-employed, or have Insufficient cash reserves.
Conforming loans vs. non-conforming
When it comes to conforming and non-conforming loans, the rules are pretty simple. To meet the requirements of a conforming loan, the property must appraise at a safe, sound, and secure standard of living. A non-conforming loan allows the property to be in poorer condition. Conforming conventional loans meet the Freddie Mac and Fannie Mae guidelines. These standards provide security and offer the homeowner peace of mind because the property has been proven sound.
Will this be your primary residence, secondary residence, or an investment property?
In some cases, the type of loan you need depends on the type of property you plan on buying. When you apply for a mortgage, your mortgage lender will want to know whether you’re applying for a loan on a primary residence, secondary residence, or investment property. The rates, taxes, and loan options will vary because the risk factors are different for your lender on each property type.
What type of lender do you need?
There is a plethora of opportunities to connect with our perfect financing professional. Some of the most common lenders are; retail lenders, direct lenders, mortgage brokers, correspondent lenders, wholesale lenders, and many other types of financial experts to guide you to the perfect loan for your situation. Unquestionably, finding a lender with patience, great reviews, and a long-standing history of being an expert in their industry is as important as finding the real estate agent and the perfect property for you. Your loan options and mortgage rates depend on the loan programs you qualify for, and not all lenders are created equal. Researching your lender and educating yourself on available loan options before blindly following financial advice is advised.
Broadly speaking, most lenders just want to help you achieve your dream. However, history speaks for itself. Who could forget the fraudulent mortgage debacles of 2008? Mortgage fraud was so common that the FBI was brought in. “The depressed economy witnessed during 2008…continuing to provide a favorable environment for expanded mortgage fraud activity. Industry personnel will feel pressure to find alternative methods to match the income they enjoyed during the real estate boom years. Many will be willing to conduct criminal activities to achieve this goal. Increasing numbers of individuals will be willing to consider and participate in illicit deals to avoid foreclosure” –FBI.gov.
Are there benefits to putting more than the minimum down payment for a house?
There are many benefits to putting more than the minimum down payment requirement for a house. In a nutshell, the greater the percentage of your home’s value you own, the better you look to the lender. Secondly, you can forego private mortgage insurance (PMI). Thirdly, a large down payment will lower your monthly mortgage payments and sometimes access lower interest rates. Essentially, you will be investing in your home’s value. You will still be able to access those funds; as long as the housing market is stabilized or growing, those funds can be accessed through a refinance or a home equity line of credit (HELOC) Add a link to Can I use a HELOC to buy another house article.).
Remember that home purchases often come with repairs, upgrades, and fees you may not have predicted. Closing costs can be rolled into the loan. There is nothing wrong with coming in with a low minimum down payment. Many lenders will show you the benefits of paying less money upfront. You should hold on to those funds and then upgrade the home. In some cases, this can multiply your initial investment by gaining instant equity when your home appraises higher. Keeping some funds liquid for emergencies is an excellent idea.
In today’s market, you may need to come in with more than the minimum down payment for a house. Competition can be fierce, and you may need to offer higher than the seller’s asking home purchase price.
Using social connections for your minimum down payment for a house
If you are lucky enough to have the best social connection, a person could ask for, congratulations! Friends or family that want you to realize your dream of a new home, you can receive gifts to offset your savings. As with most financial transactions, there are some limitations and guidelines to consider before receiving funds from friends and family. For example, your down payment amount and how you receive these gifts are critical.
Surprisingly, you must do more than Zelle or Venmo the money into your account to have a lender accept the funds as legitimate for a minimum down payment. Of course, each lender will have specific criteria based on your situation. Generally, you must submit a letter that states the monetary gift is not a loan and that you will not be required to repay these funds to your friend or family member.
Since your mortgage lender is calculating your debt-to-income (DTI) ratio very closely, they want to ensure you can afford the house. If you have to repay a gift on top of your monthly mortgage payment, this would affect your financial situation and alter the loan amount you qualify for. Additionally, you may need to provide a copy of the gifter’s bank statement to provide proof of the transfer of funds.
Unquestionably, homeownership is a solid investment! Homeownership is considered one of the most secure investments you can ever make. Oprah Winfrey said it best “I will forever believe that buying a home is a great investment. Why? Because you can’t live in a stock certificate. You can’t live in a mutual fund.” Focusing on your finances, saving money, and researching loans and lenders will put you far ahead of the pack.
What is the minimum down payment for a house? Let’s connect you with the people that can help.
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