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3.875% (3.915% APR) 30yrs
3.250% (3.282% APR) 15yrs
as of 06/25/19
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Determining Your Down Payment for First-Time Homebuyers

Determining your down payment for first time homebuyers web

One of the most important factors for securing your mortgage loan is the down payment. This upfront payment on a home is separate from your monthly mortgage payments. Planning a realistic down payment is important to getting the type of mortgage loan that you want. Because of this, saving the desired sum is important and requires considered financial awareness. Basically, the higher your down payment, the lower your monthly payments, because it is the remaining amount owed divided over the term of your mortgage.

Before you determine how you will make a down payment, it’s important to understand the requirements that certain types of loans will have, as many will require you to pay 3%-5% of the total cost of the home. An FHA loan requires a minimum down payment of 3.5% and is what many first-time homebuyers will end up using. All FHA loans also require home buyers to purchase MI, or mortgage insurance. With a 20% down payment, home buyers can use Conventional financing will not be required to purchase mortgage insurance. A higher down payment will give the buyers more options when it comes to shopping for a mortgage and ultimately with the house they buy.

The down payment is one of approximately 4 factors that will determine if a buyer is pre-approved and ultimately approved for a loan: down payment, credit history, employment and income, and bank statement history. A down payment does not actually have to be available to the buyer at the time an offer is made, so long as the full sum is available at the time of the closing.

The more you put down the lower your monthly mortgage payment will be. USDA and VA mortgage loans are government-backed and do not require a down payment which may be attractive to some customers who have difficulty saving a large sum. Homebuyers with lower credit scores may benefit from providing a larger down payment.

Here are four steps to determining how much money to put down:

1. Plan ahead
Because mortgage loan approval will involve the home buyer’s credit score, income and employment history, and bank history, it is important to evaluate these factors before beginning home buying process. Because the down payment will be provided up front, a large down payment can increase the likelihood of getting the loan that you want if you have a low credit score. However, if you have excellent credit history and income, providing a larger down payment may not be necessary unless you would like to avoid the requirement of purchasing mortgage insurance.

2. Determine what you can pay from savings
After evaluating your credit score and income history, you should determine how much you can provide as a down payment. Savings are important, so be reasonable and realistic about what you can provide. Remember that FHA loans require at least 3.5% down, and when speaking to a mortgage lender, they may provide you with their own, additional requirements. Keeping these
factors in mind will help you determine your home buying budget—but remember, lending is a conversation, and you should feel comfortable working through different scenarios with your mortgage professional.

3. Set a goal for your mortgage terms
It is important to set goals when shopping for a mortgage and one of the most important is your interest rate. If you are seeking a lower interest rate, you may want to provide a higher down payment. Not only will this offset the costs that you will be paying each month because the remaining balance on the loan will be reduced, but it will be a positive factor in evaluating your readiness to repay the loan to the lender. Remember that after a down payment, the remaining balance on the loan will be divided by the loan term, and this will be your monthly payment with interest. Figuring out these numbers with a mortgage lender will allow you to realistically evaluate what you can pay each month, and having that goal in mind will help you take the steps to get there.

4. Meet with a mortgage lender
After setting goals and determining what type of mortgage loan you would like, it is time to visit a loan professional and get a rate quote. Many local mortgage agents are happy to go back to the drawing board and help you to determine your best options for obtaining your ideal interest rate and loan terms. Remember to be open and honest with your mortgage lender, and that a local lender will be able to give you the most time and attention, opposed to large, national lenders or over-the-phone mortgage apps.

Determining your down payment is an important step in shopping for a mortgage. Remember to evaluate all of the factors that will determine your mortgage loan, set goals, and find a local mortgage lender that will work hard to realize your goals.

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