What Homeowners Need to Know: Making a Down Payment on a House

When you buy a home, whether it’s for the first time or not, you’ll typically need a down payment. The down payment for your home helps demonstrate your commitment to your choice and can impact your lending options. Still, there are several things you should know to do or avoid doing when it comes to making a down payment on a house.

Why do lenders want down payments? Because it reduces their risk. The money you put down reduces the amount of money you need to borrow. When, you put down your own money on the property, you’re invested in the home. This can make you less likely to default.

The down payment can benefit you too. By putting money down upfront, you immediately build equity in that home. Since your equity is the portion of the home’s value that you own outright, a larger down payment gives you more equity. This can improve your flexibility and financial stability.

Down payment do’s

First, let’s go over some of the main things you can do to help your mortgage search experience.

#1 Save for your down payment.

A down payment helps demonstrate you’re financially prepared for homeownership.

Your down payment also lowers your loan-to-value (LTV) ratio, which can get you better loan terms and lower interest rates.  If you pay down less than 20 percent of the value of the home, you may need to pay private mortgage insurance (PMI). This type of insurance protects the lender in case you default on the mortgage loan and the proceeds from the property’s foreclosure sale of the property doesn’t cover the outstanding balance of the mortgage.

#2 Know your budget

The more you can put on your down payment, the lower your monthly mortgage payments. Additionally, the less you borrow from your lender, the lower your cumulative interest over the life of the loan.

Determine your budget by factoring in your income, expenses, and other financial goals. You need to consider how much you can comfortably afford as a down payment, plus what you can handle as an ongoing mortgage payment.

#3 Check your credit score

The better your credit score, the more likely you will qualify for mortgage pre-approval and better mortgage rates. So, it’s a good idea to first review your credit report and, if necessary, take steps to improve your score.

#4 Look for down payment assistance

You might be eligible for down payment assistance programs offered by government agencies, non-profit organizations, or employers. You might want to consider programs such as:

• FHA Loans, backed by the Federal Housing Administration, can lower the amount of down payment required compared to conventional loans.
• VA Home Loans, offered by the U.S. Department of Veterans Affairs (VA), typically require no down payment and are for eligible veterans, active-duty service members, and certain surviving spouses.
• USDA Rural Development Loans from the U.S. Department of Agriculture (USDA) provide eligible borrowers purchasing homes in designated rural areas with loans that require no down payment.
• Housing Finance Agencies (HFAs) in your state may offer grants or low-interest loans targeting first-time homebuyers, low-income individuals, or specific geographic areas.
• Local cities or counties may offer down payment assistance programs to encourage homeownership and community development.
• Your employer could offer down payment assistance or homeownership benefits as part of your benefits package.
• Nonprofit organizations such as Habitat for Humanity, NeighborWorks America, and local housing nonprofits often provide down payment assistance programs and other homeownership resources to low- and moderate-income individuals and families.

#5 Get pre-approved for mortgage

Even before you go searching for homes, it helps to get pre-approved for a mortgage. This lets you understand how much you can borrow and your down payment requirements, which can shape your home buying budget. Keep in mind, though, this is not a binding agreement. When you actually apply for the loan, the lender may change terms and rates.

Down payment don’ts

This section breaks downs some of the things homeowners want to avoid when it comes to making their down payment.

#1 Break the bank

Although a bigger down payment has many benefits, you don’t want to use all your savings for a down payment. You will need to hold money back to be able to pay your closing costs (which can include service fees, appraisal costs, and more). Plus, you don’t want to leave yourself without any emergency savings. Keep some savings to have funds available to cover unexpected expenses.

#2 Consider monthly costs

Increasing your down payment can lower your monthly mortgage payment. Yet, you don’t want to make such a high down payment that you reduce your liquid assets such that property taxes, homeowner’s insurance, maintenance, or repairs will be a big financial strain.

#3 Limit your options

You don’t have to commit to the first mortgage offer you get. Generally, you want to get three to five quotes for mortgage rates. When comparing loan offers, consider:

• Down payment requirements
• Loan terms (loan amount, interest rate, annual percentage rate)
• Closing costs
• Lending fees
• Mortgage insurance

#4 Making major financial changes

Before you close your home, you want to avoid making significant changes to your finances. This could be quitting your job, taking on a new debt, or making another large purchase. Since lenders may reassess your financial situation before finalizing your loan, don’t risk major changes that could impact your approval.

Making a down payment is just part of your home purchase process. Our Things Homeowners Need to Know series can help you with other areas of homeownership too. Saussy Burbank would also love to help you find the home you want to make your own. Take a look at the high-quality properties we’re building in the Carolinas.