Down Payment required to buy a Home
The down payment is the part of a purchase price that you pay upfront. It can be the payment for a car, housing, or any other commodity. Our focus here, however, is a house.
When you apply for a mortgage to buy a house, the down payment is your initial input towards the purchase which also represents your initial ownership stake in the home. The rest of the money to buy the property is usually supplied by the lender. The down payment you pay affects the kind of mortgages you generally qualify for as well as the terms and conditions. But not only that, but it also affects your lifestyle as it determines your monthly mortgage payments and how much money you have for other expenses.
Generally, a lesser down payment means you pay more in fees and interest over the loan’s lifetime while a higher down payment qualifies you for lower fees and interest.
A larger down payment also gives a lower loan-to-value ratio (LTV), improving your chances of further loans with other lenders. This also helps you avoid some fees such as Private Mortgage Insurance.
A buyer with a larger down payment is seen as more reliable and therefore is out in a better space with sellers. Lenders usually require a down payment for most mortgages except loans like the USDA and VA loans.
20% Down payment for a home loan
Putting a minimum of 20 percent down payment will increase your chances of getting approved for a mortgage at a fair rate. However, the minimum down payment for a home depends on the type of mortgage. For instance, FHA loans require only as little as 3.5% down as they are backed by the Federal Housing Administration.
The minimum down payments may also vary by lender and the borrower’s credit history. For instance, the minimum down payment requirement for an FHA loan being 3.5% is mainly for lenders with a credit score of 580 or higher, while lenders with a credit score of 500 to 579 have a 10% minimum down payment.
A low-down-payment may speed up your homeownership but there are certainly benefits to having a higher down payment. A lower down payment signals a risk to the lender and so the interest over the loan is higher, compared to a larger down payment. Therefore, a larger down payment affords a borrower lower ongoing fees and a lower monthly mortgage payment.