The Truth about Down Payments

I work with a lot of first time home buyers.  I love it.  I love helping someone to find their first place, whether they are single, newlyweds, or getting ready to start a family.  There is always a good reason people decide to buy their first house.  I am happy to say that I have gotten more than a few buyers out of their parents' basements ;-)

When buyers come to me, there are a lot of misconceptions about the real estate process.  I know I have said this before, but my life is not like a show on HGTV.  I very rarely go out in one night and find someone the house of their dreams among three choices.  I don't have a team of handsome twin brothers who can help my clients renovate a home that might just be the one for a great price.

In the real world, the other part that is always confusing is how much money you will need.  Closing costs vary, sometimes sellers will contribute to the buyer's closing costs, but one thing you need to have is a down payment.

Now, I have to say that I have had buyers who didn't know they needed a down payment.  They had a good income, good credit, but didn't have any money saved towards buying a house.  That typically doesn't work.  I often have buyers that think they need to have more money to put down than they need to.  Just for fun, let's ask this.

If Joe wanted to buy a $100,000 house, how much would he need to put down?

A. $ 0

B.  $3,500

C.  $5,000

D.  $15,000

D.  $20,000


Think you know?  Your answer might depend on your age, or your familiarity with today's market.

The truth is that in today's market, there are many options for financing.  The minimum downpayment on an FHA loan is only 3.5%!  FHA loans are great for first time home buyers who might not have much saved up in cash.  There are some restrictions for these loans though, and with PMI, you can end up paying more each month.

But, right now, there are conventional loans that start at a minimum of 5% down!  Conventional loans are typically a better package, no PMI, and less stringent appraisal guidelines.  If you ever want to buy a home with peeling paint - go conventional.

If you think that you need to save up 15% to buy your home, think again!

So, in reality, the answer to my question is a trick  - Joe could make just about any of those choices or more.

A. $ 0 - Down payment assistance is available on some USDA loans, but only areas that qualify.  Also, if you are a Veteran, you may qualify for a $0 down loan.  

B.  $3,500 - At 3.5% down, you can get a typical FHA loan.  FHA might have higher rates, or costs associated, but they have a lower credit score cut off making home affordable for more people.    

C.  $5,000 - If you have good credit, and can scrounge up an extra 1.5% to put down, go conventional!  These are typically better loan packages and you have less restrictions.  

D.  $15,000  - If Joe is a traditional buyer and has saved well, he can put 15% down and typically get a better rate on his conventional loan.

D.  $20,000 - Putting 20% (or more) down is a sure way to get the best rates out there, and also to have an offer appealing to a seller.  

Consider this my public service announcement for the day.

Talk to your lender if you have questions about any of this, or call me today to talk about how we can get you into a new home!