If you’re shopping for your dream house, a key factor in whether or not you’ll get mortgage loan approval is whether you have enough money for a down payment. The amount required is typically a percentage of the home’s purchase price—and lenders traditionally want to see borrowers put down 20% . So for example, you’d need to put down $20,000 for each $100,000 of the home’s purchase price.
But, is that always true? Do you always need to put down that amount of money? If not, what are the benefits and challenges associated with a down payment that’s less than 20%?
This post will look at these questions and more to help you qualify for a mortgage loan, and ultimately turn your dream house into a reality.
If you discover you don’t yet have enough money to buy the house you want, consider our budget-making tips and savings strategies to get you where you need to be, financially speaking, to buy your house of choice.
Mortgage Loan Qualifications
The question of how much to put down on a house is really a subset of a bigger home-buying question. The question is really whether the house you want is within your budget.
Many homeowners take their household gross annual salary (before taxes) and multiply it by two and a half; that would be the most, they decide, they can afford in a house. So, if your household income is $200,000, hypothetically, the maximum purchase price, using this formula, would be $500,000. Note that this isn’t a formula used by a lender; rather, it’s a general rule of thumb that people use.
From a lender’s perspective, they often want your mortgage payment to be, at most, 28% of your gross annual income. So, using the figure of $200,000, that would equal a maximum mortgage payment of $4,666 per month ($200,000/12 x 28%).
For this last calculation, you’d need to add up your proposed housing expenses, including principal, interest, taxes, insurance, homeowners’ association fees, and potential private mortgage insurance fees.
And your estimated housing payment will depend on how much of a down payment is applied and other items included in the monthly mortgage payment such as:
• Private Mortgage Insurance, if applicable
• Homeowners’ Association (HOA) Fees, if applicable
• Other miscellaneous assessments (such as flood/wind insurance coverage, or earthquake insurance)
To find the answer, it can help to do some reverse engineering.
Let’s say the house you want costs $400,000. If you were to finance the home with a lender, you’d need $80,000 plus closing costs to swing a 20%-down deal. So, the first question is whether you have or can get those funds easily enough.
If the answer is “yes,” then you can check your income against the formulas we’ve provided to see if all works out according to plan. If so, at least you’ve got the option to go with a 20% down payment. Whether you should or shouldn’t is another question, one we’ll address later in this post.
Before we do, let’s say you don’t have that kind of cash for the down payment. You could afford, say, 10% down plus closing costs, and still meet the income requirements. In that case, your next step is to see which lenders offer this kind of program (hint: SoFi does!). But first, let’s get into some other home loans, and consider how much you should put down on a home.
One home loan option is a Federal Housing Administration (FHA) loan. FHA loans are a governmental program that was initially created to help people buy homes during the Great Depression. It’s still available today and people who can’t afford larger down payments might choose this option.
The Federal Housing Administration doesn’t directly make mortgage loans. Instead, certain lenders offer FHA loans that are backed by a governmental guarantee. Because of this guarantee, lenders will typically offer more flexible guidelines for mortgage approvals, including the size of the down payment.
In general, if you have a credit score of 500 to 579 , the minimum down payment required for FHA loans is 10%. If your credit score is 580 or above, the minimum down payment is 3.5%.
If you’re a military veteran, active service member or, in some cases, a military spouse, you may qualify for a U.S Department of Veterans Affairs (VA) mortgage loan without a down payment. This program was created by the United States’ government in 1944 to help people returning from military service purchase homes.
Some conventional lenders, including SoFi, will provide mortgage funding for homebuyers with less than 20% down. Often, in these cases, you’ll need to purchase private mortgage insurance (PMI) that insures the lender; this is above and beyond the type of insurance you buy to protect your home and belongings. With SoFi, the minimum down payment is 10% for loans up to $3 million.
How Big Should Your Down Payment Be?
According to the National Association of Realtors , millennials made up the largest share of homebuyers at 36%—and 65% of this group were first-time home buyers. Due to their age of 37 years and younger, some Millennials haven’t had sufficient time to save for a large down payment, so the average down payment for this group was only 5%.
According to a report from U.S. Mortgage Insurers (USMI); it could take up to 36 years for an average income individual to save a 20% down payment.
In general, it makes sense to put down as much as you can comfortably afford. That’s because, the more you put down, the less you’ll be borrowing, which translates into more equity in the house and lower monthly payments. Plus, with a lower mortgage amount, you’ll pay back less interest over the life of the loan.
On the other hand, it doesn’t always make sense to empty the bank in order to put down the largest down payment possible. That’s because you’ll likely have moving expenses, plus you’ll need to pay closing costs, which can vary due to many factors such as: purchase price, state in which property is located, interest rate chosen, lender processing fees, and more.
Furthermore, the home you’re moving into may need cosmetic repairs, or you may want to redecorate, add new landscaping, and so forth. Plus, you’ll probably want to keep an emergency fund to pay for unexpected costs.
If this doesn’t all seem doable, then it may mean that you should look for a more affordable house for now and save up for your dream house. Or, if you can wait a while before buying, then you can create a savings plan to build up a down payment. If you have questions, SoFi’s Mortgage Loan Originators (MLOs) can help explain the down payment, closing, insurance, title, and escrow processes to you.
Saving for a House
If you are ready to realize your dream of homeownership, now is the time to get serious about saving. The next step is to make a plan to save up those funds.
So, we’ve created a home-buying plan to help you do just that. Steps include:
1. Tracking your spending, including fixed expenses (rent, utilities, car payments and so forth) and variable ones (dining out, clothes shopping, hobbies and so forth). Add in expenses that you pay annually or semi-annually, breaking those down into prorated monthly amounts.
3. Brainstorming ways to boost your income; don’t forget that asking for a raise may be a good option!
4. Figuring out what you can save each month, both for emergency expenses and for your house fund.
5. Setting a timetable for your plan to save for your house.
Mortgage Loans at SoFi
Then, when you’re ready to start looking for a home loan, you can use our mortgage calculator to quickly look at a variety of financing scenarios. And it takes just two minutes to find your rate.
• Benefits of choosing SoFi for your mortgage loan include:
• No hidden fees
• No prepayment penalties
• Flexible debt-to-income ratios, qualifying borrowers for more financing
• Rate discounts for SoFi members
• Choices between fixed rate and variable rate loans
• Choices of term
You can get painlessly pre-qualified in just minutes with no obligation or commitment. When ready, select your loan and apply online. Once approved, sign paperwork and your funds will be transferred, typically within 30 days.
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