Understanding how the down payment for buying a home works

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Down Payment 101

A down payment is a very important first step in buying and owning your own home. Having a down payment is a good sign that you’re ready to tackle home ownership and likely be able to handle the monthly expenses that come with home ownership; including the monthly mortgage payments, property taxes and any repairs that come up. Mortgage lenders require a down payment to help offset their risk. The larger the down payment the less they end up losing if they foreclose. If a buyer puts down less than 20% they will have to get private  mortgage insurance (PMI). This insurance repays the lender a portion of the loan if it goes into default. You will need to remember that PMI insurance will increase your monthly mortgage payments. The size of the down payment can affect your interest rate. Most mortgage lenders will offer a lower rate to buyers with larger down payments.

The money for a down payment can come from several sources:

  • From your own savings

  • Gifts from family or friends

  • Profits from the sale of a home

  • Grants from nonprofits and employers

The average buyer thinks they must have between 17% and 21% of the purchase price for a down payment. While 20% is the industry standard, many people with high credit scores are approved for a mortgage loan that requires much less down. Discuss with your lender what is possible in your case. Loan programs through the VA, FHA and USDA all have low down payment programs if you qualify.

 

There are several benefits to putting down a 20% down payment on your home.

  • You will pay less monthly: There will be no PMI payment each month.

  • You will pay less interest: Most lenders give a lower rate to those buyers who put down a 20% down payment.

  • Sellers: Look favorably at buyers that are putting 20% down. In a crowded market this is a plus for the buyer. 

     

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