Down Payment for a Home

$100 Bills

When it comes time to consider purchasing a home, many things go into the decision-making process. Most people will need to take out a mortgage to make the purchase as it will typically be a significant investment. One thing to plan for is the down payment required to close the loan and purchase the home.  Depending on the type of loan, that amount of money could range from nothing required up to 20% of the home purchase price.

Some loans require Private Mortgage Insurance (PMI) which protects the lender in case of a borrower default. A rule of thumb is that if the borrower will have less than 20% invested in the home at closing, then they will probably have to pay PMI. Those payments are usually included in the monthly mortgage payment, but can be removed as an obligation once equity reaches the equivalent of 20% Loan to Value Ratio. The borrower can get this increase in equity either through paying down the mortgage, an increase in the home’s value, or a combination of both. So the value of targeting a 20% down payment should not be overlooked.

What about not having nearly 20% to put down for the home purchase? First, do not despair. This lack of money for a down payment is not unusual, particularly for a first time home buyer. So what should the prospective buyer do? Money may typically be obtained via a gift, borrowing from a retirement account (with some restrictions), choosing a loan program such as offered by the FHA (which only require a 3.5% down payment if the credit score is at least 580), or maybe even working a part-time job. There are other be other programs, such as first time home buyer loans, and other options that could be available for the borrower. Working with a knowledgeable mortgage advisor to help guide the process for great options and outcomes makes good sense.