When buying a new home and having a mortgage, down payments are essential, unless a buyer is paying with all cash. There’s a lot that goes into down payments and understanding the different ways that they can work, and it can sometimes feel overwhelming, especially for first time home buyers. Here is all the information home buyers need to know about down payments before making an offer on a new home.
What Is a Down Payment?
A down payment is an amount of cash money that buyers are expected to have when purchasing a new home. The amount of money a down payment will cost will depend on the type of loan the buyer is using, but traditionally, the amount is between 3.5% and 20% of the home’s total cost. For example, on a 20% down mortgage, a home that costs $200,000 would require $40,000 in cash at closing. The remainder of the purchase price required will be loaned to the buyer through a bank or an other private institution. That will become the principal of the mortgage and is usually paid by monthly mortgage payments.
Paying Less Than 20% Down
While 20% is the usual amount banks look for as a down payment, it’s also possible to pay as little as 3.5% down. For the same hypothetical $200,000 home, a 3.5% down payment would only cost the buyer $7,000 down, which is far more easily attainable than the $40,000. Certain mortgages such as a Federal Housing Administration (FHA) loan allow buyers to have a decreased down payment, which makes homeownership more accessible to more people. This makes them especially popular with people who have never owned a home before.
However, it’s important to know that because of the lower down payments, home buyers may have to pay mortgage insurance premiums (MIP) or private mortgage insurance (PMI) in addition to paying higher monthly mortgage payments than they would have if they’d payed 20% down. Home buyers interested in paying less than 20% down need to know the potential risks of doing so, so they aren’t caught off guard later on after they’ve already committed to purchasing a home.
Buying a Home Without a Down Payment
Just as there are mortgages that let home buyers pay less than 20%, there are also mortgages that allow buyers to purchase a new home without any down payment at all. The first of which is a Veterans Affairs (VA) loan, which are useable by all active and past members of the US military, and in certain approved cases, their family or spouse. There are also specific types of VA loans that are intended to help specific types of people such as Native Americans who want to purchase land on a reservation or veterans who want to refurbish their home to make it accessible.
The second type of loan that doesn’t require a down payment is a United States Department of Agriculture (USDA) loan. These loans encourage people to move to approved suburban and rural parts of America because increased population will help grow the economies of these rural and suburban areas. Unlike VA loans, anyone interested in moving to one of the government approved areas of the US is eligible to use a USDA loan.
All Spring, Texas home buyers need to know what options are available to them when it comes to down payments and mortgages. By keeping this information in mind, buyers can help themselves make the best decision for their circumstances and needs.