What is an Appropriate Down Payment for a House?
Coming up with a down payment for a house, that makes sense for you, can be tricky. A lot depends on what you have in savings, but you do not want to empty your account in order to pay a certain percentage.
According to a recent article in the New York Times, the national standard for down payments is changing: “As part of the financial reforms mandated last year by the Dodd-Frank law, the agencies, including the Federal Reserve, the Federal Deposit Insurance Commission, the Department of Housing and Urban Development and the Federal Housing Finance Agency, among others, must set criteria for what constitutes a reasonably safe, plain-vanilla mortgage.” Agencies have proposed 20% down as the low water mark for a ‘safe’ mortgage (in terms of a mortgage risk to borrowers), but this percentage has been shot down by lenders as an unrealistic standard for today’s potential homebuyers.
If you can afford to pay down 20% and still have money left in the bank to pay for unforeseen expenses, great, you are living the dream! If you cannot afford to pay 5% or even put any money down, the chances that you will qualify for a mortgage are much slimmer, as you will be seen as a high risk to lenders due to your lack of investment in the property. With none of your own funding invested in the mortgage, investors see you as a risk to walk away and saddle them with your loan payments.
One highly tangible benefit of paying 20% down immediately is that you won’t have to pay PMI. PMI is extra insurance that lenders require from most homebuyers who obtain loans that are more than 80 % of their new home’s value. In other words, buyers with less than a 20% down payment are normally required to pay PMI. This is also good to know even if you did pay 20% down initially, but are approaching 20% in equity. Once you hit 20%, get that PMI cancelled! You could save some serious dollars, depending on the size of your mortgage.
It is more likely that your down payment for a house should be somewhere in the middle. Generally, a down payment for a house could be 5%, 10% or 20% of the sale price. The more money you put down, the lower your mortgage payment, and thus the more house you can afford to buy.
Deciding on getting a Chicago mortgage is not a task you should take lightly. So, before you plunge into the mortgage process, make sure you do your homework. Calculate your mortgage and budget in advance before you call a mortgage lender. Once you are ready to seriously consider making an offer on a home, ask a mortgage lender to show you the savings you will make in the long run with a higher down payment.
This usually entails finding out how much your house will cost. Afterwards, determine if you can afford to apply 30% of your regular monthly income to the monthly payments you will be making on your mortgage. Most home buyers have a partner, usually their spouses, when applying the 30% rule to their combined income. This can help you qualify for a larger mortgage, as you are magnifying the purchase power of two incomes
The most important thing to do is consider what you want to keep in savings, and what you can afford on a monthly basis. If 20% totally depletes your savings, put down 15% instead. You will have higher monthly payments, but you will also still have a piggy bank! If you cannot afford 5%, you may want to consider saving up for a while. Considering a down payment for a house is a key element to the homeownership process. Analyze your personal financial situation in consort with an experienced mortgage professional and set yourself up for a rewarding experience for years to come!