How Much Do I Need to Put Down?

If you’re like us, you have a list of resolutions this year.  A lot of people we’ve spoken with lately tell us that buying a home in 2016 isn’t necessarily their New Year’s resolution, but planning to buy a home is–with one thing in their way: the down payment.

Most of us often feel anxious and overwhelmed at the idea of saving for a down payment.  The good news is that first-time home buyers can purchase a home with as little as 3 percent down in some programs.  There are a few stipulations to this, but we’re giving you the lowdown below.

The less you put down, the higher the mortgage balance, and the more you’re going to pay.  Typically, homebuyers who don’t make a minimum down payment of 20 percent will be required to pay private mortgage insurance (PMI).

What is PMI and how much does it cost?

PMI protects the lender in the event you default on your loan.  The cost is most often added to your monthly payment if you’re taking a conventional loan, while loans offered through the Department of Veterans Affairs, the U.S. Department of Agriculture and the Federal Housing Administration handle PMI differently.

The less you put down, the higher the mortgage insurance is.  With say, 5 percent down, your PMI is quite high.  The total cost of PMI depends on your credit score, and is calculated in terms of risk in tandem with the size of your down payment.  For each $100,000 borrowed, PMI typically runs between $30 and $70 per month.  If you’re buying a home worth $500,000, with say, 10 percent down, with a 30-year-fixed rate at 4.25 percent, you could expect to pay up to $200 per month in private mortgage insurance.

You have options.  If you need to pay PMI, the size loan you can get will be slightly smaller, to allow for the bigger payment.  If you get a conventional mortgage, you can get an appraisal and write to your lender and ask to have the PMI removed once you have more than 20 percent equity in the house.  FHA loans, on the other hand, have PMI attached for the life of the loan.

So how much should you put down? 

Depends on your personal circumstance.  You’ll want to make sure you have enough on hand for closing and upfront costs, such as a years worth of taxes and insurance.  We suggest speaking with a mortgage broker who can examine your current situation and make a plan that’s in line with your goals.  A good mortgage broker can help you weigh your options and help you decide how large of a down payment you’ll need.

There are a few popular programs you can get with a low down payment, which may be particularly appealing to first-time home buyers.

Conventional mortgage: Fannie Mae and Freddie Mac can back loans with as little as 3 percent down.   To qualify for this type of loan, you’ll need good credit.  If your credit isn’t in good shape right now, talk with a broker than can put you on a good trajectory to start the repair process.

Federal Housing Administration loan: This can be more expensive than a conventional loan, but the FHA has backed loans with as little down as 3.5 percent.  They’re also more willing to back loans with buyers who have lower credit scores and thinner credit records.  PMI will certainly be factored into this, making the size of the loan you’ll be able to afford a bit smaller due to the monthly payment.

U.S. Department of Veteran Affairs: If you served in the military, you can get a loan backed by the VA with no down payment at all.  You’ll have loan origination or funding fees but those can be financed in.  This is a really good program, though you’ll still need to qualify based on credit and income.  The interest rate is low, there’s no PMI and you may find some extra perks along the way.