If you’re thinking about buying real estate for the first time you’re probably going to have a ton of questions. One of the questions we realtors get asked the most is ‘How much do I need for a down payment?’
Before we dive in we’re going to cover what a down payment actually is. A down payment is the initial cash you pay in order to get a home loan. This initial cash you pay will then be deducted from your loan and will represent the start of your equity – the stake that you own in the house.
Now that we have that out of the way lets figure out what kind of cash you’ll need to come up with. It’s hard to answer this question without knowing your situation so what you need to do is ask yourself what exactly you’re trying to achieve? Do you want to buy a home with as little cash as possible or do you want to get a head start on building your equity?
Typically, most people start with 20% down, however if you don’t have that kind of cash under the mattress then there are some other great solutions out there for you. The minimum down payment is actually 3.5% with a 30 year FHA loan. This solution is extremely popular with 1st time homebuyers. They require lower minimum credit scores and down payments than a standard 20% down conventional loan. You might be asking yourself right now why doesn’t everyone buy with less?
There are actually a few caveats to FHA Loans. If you decide to go down this route its very important to understand that with less money down, your monthly payment will be higher than if you had a higher down payment. You will also need to pay private mortgage insurance. You will be limited to a certain loan amount as well. Another reason why some people don’t go this route is because it actually limits your buying power and restricts you from certain properties that aren’t qualified to accept FHA loans. Your options in the housing market will definitely get slim. Lastly you won’t own as much equity in the house if you buy with a small down payment since you’ll be borrowing most of the homes value. However if you are limited on cash upfront, find the right property, and can keep up with the monthly payments this could be a fantastic option.
The reason why people buy with a higher down payment is the opposite of all the reasons people go with an FHA loan. If you have the cash its always better to do a higher down payment. You get to enjoy lower monthly payments, no pre mortgage insurance, stronger buying power, more options in the housing market, and more ownership stake.
In the end it all boils down to what you are comfortable with and what’s right for your situation. If you need to get more information on what programs are out there to help assist you with your home loan then the best thing to do is get in touch with a local lender to start discussing your financing options.