How Much Down Payment Do You Need?
Evan, who hopes to buy a home one day, is getting conflicting information about how much of a down payment he'll need. Whether or not he has enough money might have an effect on when he'll be ready to purchase a home. He's heard that down payments can range from 5 percent to 20 percent. The more he puts down on say, a $250,000 loan, the lower his payments would be. But if cash flow is low, he could do a small, 3.5 percent down payment.
The amount of down payment necessary when buying a home depends on the type of loan Evan's applying for, such as a government loan like an FHA or VA loan, or a conforming loan from a private institution. In the case of non-conforming loans, which are typically "jumbo loans", the down payment requirement can be 20 percent.
Evan asked the What Works Now experts to walk him through some of the different loans available right now and how much he'd need in savings before making an offer on his dream home.
According to expert Todd Dal Porto, Home Loans Enterprise Sales Executive at Bank of America, FHA loans are a popular option.
FHA loans are a great way to get your foot in the door with a low down payment, says Dal Porto, as the minimum down payment requirement is only 3.5 percent of the mortgage amount you're seeking. It amounts to a 96.50 percent loan-to-value amount -- but he points out that there's a cap on the value of the home, and that is set county by county. The cap exists mainly because affordability varies in a given area. Los Angeles County, for example, is currently capped at $729,750, whereas most counties around Nashville are capped at $432,500. (See where your county stands.)
Another good thing about FHA loans is that they're open to anyone, regardless of income. Because even those with a higher income might not necessarily have the savings for a sizable down payment. However, FHA does watch your credit score, as would any lender. It may even soon implement a minimum FICO score of 580.
Dal Porto also points to VA loans, which are available for eligible military veterans, and have a zero-down-payment option for 100 percent of the loan-to-value, provided that the loan is no more than $417,000. For higher loan values, a down payment would be required and would vary based on the appraised value or purchase price.
Conforming loans, which can have a fixed or variable interest rate -- although most borrowers choose a fixed rate -- are given out by private lenders, such as Bank of America. Lenders set their own minimum guidelines for this product, but currently Bank of America requires a minimum of a 5 percent down payment for loans up to $417,000 and 10 percent for loan amounts up to $729,750.
There are some exceptions to the minimum down payment, however. A down payment of 3 percent may be allowed if the borrower's income is below the HUD median income for the area where the home is located. And, borrowers can also use a down payment assistance program to have a third-party cover all or part of the down payment.
The simple answer, says personal finance expert Lynnette Khalfani-Cox, is to not overextend yourself. Homeownership comes with a lot of hidden costs, from the property taxes to homeowners insurance and repairs. And don't forget that you're going to want to decorate. All these costs can add up to thousands of dollars more than you planned.
It's not fun to be house poor -- whether you're young, or retired and living in Florida. Make sure you consider the list price of the house, your down payment and your remaining savings carefully, so that you don't end up letting your house own you instead of you owning it. That would truly be uncomfortable.
Interested in learning more about savings and homeownership? Here are some AOL Real Estate guides that might help:
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