Video Transcript: How Much Down Payment Do You Need
[Enter Regina Lewis, AOL Consumer Advisor]
Regina: Thinking of buying a new home? Navigating the real estate market can be tough. Now it's time to get answers from the experts. Get ready to find out how much of your savings buying a home will really consumer.
Regina: Now that you've decided you're ready to buy and have money for a down payment, let's see how you can maximize your dollars in this process and use your savings most effectively. We've got a video question to get us started.
[Question from Evan, a prospective homebuyer]
Evan: Hi, my name's Evan. I found this great place that I want to buy. I've heard that down payments can range from 5 percent to 20 percent. Which one is the right amount?
Regina: Alright, Todd, he sounds a little frustrated. Is there a right amount?
[Enter Todd Dal Porto, Home Loan Enterprise Sales Executive for Bank of America]
Todd: Well I think the right amount is what each individual consumer, in consultation with their real estate lending expert, determine. But he's right; there are a variety of options. You can make as little as a 3 and a 1/2 percent down payment on a lona that's going to be insured by the Federal Housing Association, more commonly known as the FHA. For a conventional loan – those are typically sold to Fannie Mae or Freddie Mac – it's a minimum of 5 percent down payment. But often, if you get into what's referred to as a jumbo loan – loans that exceed those available from these federal agencies – it is as much as 20 percent.
Regina: Wow, so there is a real gamut.
[Enter Lynnette Khalfani-Cox, Personal Finance Expert]
Lynnette: Right, but I think for consumers another key point to remember is if you do come to the table with a bigger down payment – perhaps you've scraped together and saved for a year, two years, three years, and you have a 5 percent down payment, a 10 percent, or perhaps 20 percent down payment, that makes your position stronger when you walk in the door. You already have equity to own that house, and it also tells me a lot about your readiness as a homebuyer, because the number one obstacle for first-timers is just scraping up that down payment. So if someone's been able to save 10 percent for a down payment, that shows me they've got a lot of financial discipline and they've been saving and doing the right thing.
Regina: Yeah, changes the whole equation. OK, so you're going to have thresholds you need to meet – you knew that going in. And sometimes you might even be able to exceed them, if you're lucky enough. Which begs the question: how much cash should I have after this whole process? Cash is king, Todd, so realistically what would you advise people?
Todd: Great question. There are program requirements, so at a minimum, one would be expected to have at least two months of reserves – two months housing payments, in reserves. But programs vary, and many may require six months, some 12 months or more. So it really depends. Ultimately the right answer is what is that consumer is comfortable having in reserve after they've made the close and closed on the transaction.
Regina: So how do you figure out your comfort level, Lynnette?
Lynnette: Well I think there is a general benchmark people can use. And I like the 2 percent figure, in terms of 2 percent of the overall value of the home you're buying. So, lets say you're buying a $250,000 home. Two percent of that is $5,000. Ideally, you should have that money set aside, to deal with any emergency that comes up with the house. Whether the roof leaks or your boiler goes out, or you just want to buy new drapes and curtains or appliances for the house. Those are the kinds of considerations that are keeping people in homeownership for years to come, as opposed to just putting aside money for the down payment, paying the closing costs and then having absolutely no money once they get into the house.
Regina: So when you're saving up, you gotta make save up for that down payment and make sure you have cash reserves on the back end.
Todd: It's important that consumers plan ahead, as Lynnette mentioned. There are both people would like to do, such as decorating, and then there are things like repairs, maintenance, that type of thing. So in evaluating that decision to buy and getting organized and ready, one should absolutely plan ahead.
Regina: Yeah, and its not just about the down payment. And it's not fun to be house poor – been there, done that. Lynnette's right, you both are, that it can be an uncomfortable scenario. So make sure, when you're considering what you can comfortably afford, that you look at your level of savings and your ongoing expenses.
Regina: You can find more information on this topic as well as this video in its entirety on demand on AOL Real Estate's "What Works Now" section.