When it comes to buying a home, many people feel a little overwhelmed with the abundance of information they receive. Buyers have to deal with terms such as mortgage interest rate, homeowners insurance and closing costs, which they may not already be familiar with. However, before any potential home buyer gets to the part of the process that includes insurance and closing costs, they have to deal with down payments.
A down payment is the amount of money a buyer puts down up front, which is required by many financial institutions before they will offer anyone a home loan. This reduces the amount of money the buyer must borrow, and it helps buyers get lower interest rates on home loans. The big question most home buyers have is how much of a down payment they need to purchase a home.
Coming up with a down payment for a home is easy for those who already own a home that has equity, but for first-time home buyers, saving enough money for a down payment is difficult. The traditional amount that banks require as a down payment on a home is 20 percent. On a $200,000 house, buyers need a $40,000 down payment. Saving money for such a large down payment is not a simple task, and not everyone can do it.
The benefit to putting down 20 percent of a home’s value is that buyers will get the lowest cost loan. For buyers who face difficulty saving money to this degree, there are government programs available to lend a hand. Military veterans who want to purchase a home have the option to secure a VA loan from the federal government. The Federal Housing Administration (FHA) and the Veteran’s Administration (VA) provide loans backed by the government that require a down payment of less than 20 percent. In fact, many VA loans are available without any sort of down payment. Loans offered by the FHA require a down payment of only 3.5 percent of the purchase price of a new home, which is a much more affordable $7,000 for a $200,000 home.
Buyers who opt to take out a VA loan to purchase a house and put no money down will have to pay a funding fee, which is 2.15 percent of the amount of the home loan. This also applies to buyers who purchase a home with a down payment of less than 5 percent. Buyers who put 5 to 10 percent down on a house with a VA loan only pay a 1.5 percent funding fee. Buyers who opt to purchase a home with an FHA approved loan are required to pay a 2.25 percent insurance premium. Both the VA funding fee and the FHA mortgage insurance premium fee can be added to the amount of the loan so buyers can pay those fees on a monthly basis with their mortgage. This makes saving money for a down payment much easier for some buyers.
Finally, there are conventional mortgages, which only require home buyers to put down between 3 and 5 percent. A conventional mortgage is given through the use of private mortgage insurance. With private mortgage insurance, lenders consider the buyer’s credit score and the amount of the down payment to determine a rate. Depending on these factors, some buyers will receive a better rate by opting to take out a VA or FHA loan to purchase a new home. Buyers should also consider how much they will be required to pay in closing costs. Closing costs add more to the cost of the home, and for many this means more saving is necessary.