Are you ready to be a homeowner but unclear on the details of down payments and other fees associated with the homebuying process? We’ve responded to some common questions to help you navigate this part of the homeownership journey.
What is a Down Payment?
A down payment on a home is simply the portion of the purchase price the buyer pays up front, along with closing costs. The remainder of the purchase price is covered by the mortgage and repaid monthly.
How Much Should I Put Down?
A down payment is sometimes a flat amount, but is more often expressed as a percentage of the purchase price—generally ranging from 3% to 20%. The higher the down payment, the lower the monthly mortgage payments and, often, the lower the interest rate. While that sounds great, be mindful not to deplete your savings. Afterall, a new home means new expenses—like utility costs, furnishings, maintenance, and home emergencies.
So, let’s say you’re making a 15% down payment on a $300,000 home. The down payment amount is $45,000, which the lender will likely require via certified check, cashier’s check, or wire transfer.
Overall, a down payment should depend on your individual financial situation and the specific requirements of your home loan.
What is Private Mortgage Insurance?
Private mortgage insurance—or PMI—protects lenders in cases of loan default. Buyers with conventional loans as opposed to federally protected mortgages (more on that below) are often required to purchase PMI if their down payment is less than 20%. The lower the down payment, the greater the risk for lenders. PMI is for their benefit only—it doesn’t protect you from foreclosure or a lower credit score if you fall behind on payments.
PMI cost depends on the type and amount of the home loan, size of the down payment, and your credit score—and generally ranges from .5% to 2%. So, on your $300,000 home, you could pay $1,500 to $6,000 per year until you’re eligible to remove PMI.
Is there Mortgage Assistance?
Instead of going the conventional loan route, buyers with limited savings or lower credit scores may qualify for assistance with mortgages and down payments.
The U.S. Department of Housing and Urban Development’s Federal Housing Administration (FHA) offers the FHA loan program. FHA insures loans so lenders can offer better rates, which can lower closing costs and down payments—allowing as little as 3.5% down.
The U.S. Department of Agriculture offers USDA loans, which typically don’t require down payments, for qualifying urban and suburban home buyers.
The U.S. Department of Veterans Affairs guarantees VA home loans, which also commonly forgo down payments. Current and veteran military members and surviving spouses may qualify.
Additionally, most states have housing agencies that offer down payment assistance or rate reduction for income-qualified borrowers, veterans, and educators.
What Should I Know About Closing Costs?
We mentioned closing costs…and you will definitely pay your fair share. For starters, there are fees associated with services used to finalize the sale and process your mortgage. Your real estate attorney and mortgage lender don’t work for free, of course.
You can also expect additional line items like application fee, credit report fee, homeowners insurance, property appraisal fee, transfer tax and underwriting fee, among others.
These fees vary so it could benefit you to shop around, but they typically range from 3% to 6% of the purchase price. Back to that $300,000 house, you could pay an additional $9,000 to $18,000 in closing costs.
Sometimes lenders offer to pay closing costs or roll them into your loan—but be mindful that this arrangement usually results in a higher interest rate so lenders can recoup those expenses. And in the end, you could pay interest on your closing costs.
A Final Word on Down Payments
The down payment process is an important part of the homeownership journey requiring planning and preparation. At Sunrise Banks, we believe homeownership should be an option for everyone. Sunrise’s mortgage lenders offer a variety of loan solutions to meet your specific needs, including lender credits to help with closing costs and down payment assistance.