How Much Should a First-time Homebuyer Put Down?

The more money you have available to use as a downpayment, the less of a mortgage you will need. But how much is really enough? Saving money to buy your first home can seem like an impossible task, but a first-time homebuyer down payment may not need to be as big as you think.

What to consider when looking at putting money down? 

Your down payment amount can impact how much your monthly mortgage payments will be as well as the type of mortgage you can apply for. A downpayment that’s too small could result in paying more interest and associated fees for the lifetime of your mortgage. On the flip side, a downpayment that’s too big could leave your family struggling with unnecessary financial burdens and negatively impact your long-term financial outlook.  

When it comes to financing your purchase, it’s important to look at the big picture. Factors like mortgage closing costs, packing and moving expenses, getting internet, utilities, and other services set up in your new home, in addition to regular monthly expenses, can all affect how much of a first-time homebuyer down payment you should aim for. 

A 20% down payment is a popular option, but it is no longer the minimum amount home buyers need to put down — many first-time homebuyers’ down payment can be 5% of the home’s value or less.

How can I get money for a down payment? 

A little creativity and careful planning can go a long way when it comes to saving for a downpayment. 

Open a dedicated down payment bank account

Open a bank account exclusively for your down payment. Make deposits whenever you have even a few extra dollars at the end of the week and don’t touch a penny of that money until you’re ready to buy your home.

A dedicated downpayment bank account can help you keep track of the money you’re saving. And it comes with an extra benefit: watching your down payment balance grow is a great motivator to save more.

Temporarily reduce retirement contributions 

Reducing your retirement contributions for a brief period can be an effective method of saving for your down payment. Set a strict timeline for yourself, reducing retirement contributions only for the duration you’re actively saving. Once you’ve hit your downpayment goal, increase your retirement contributions again.

Apply for government funding 

In addition to saving money, you can find extra support for your down payment through several government programs that can lower the amount of money you’ll need to save.

  • Federal Housing Authority (FHA) Home Loan: The FHA home loan program helps first-time homeowners qualify for a home loan with less than the typical 20% down payment. The FHA loan offers a 3.5% down payment option for most borrowers. The FHA insures mortgages issued by FHA-approved lenders, like River City Mortgage, making it easier for borrowers with lower income or credit scores to qualify. FHA loans also require a smaller downpayment compared to conventional loans. 
  • The Department of Veteran’s Affairs (VA) home loan program: Certain military personnel and surviving spouses can qualify for a 0% down-payment mortgage loan. The Department of Veteran’s Affairs determines eligibility, sets the mortgage terms, and guarantees a portion of the loan, but the VA doesn’t physically provide the financing. As with FHA loans, VA home loans are issued by VA-approved private lenders, such as River City Mortgage.

How much should you put down for your first house?

Your down payment size will influence:

  • How much you’ll pay monthly (how much you can afford to spend on a house)
  • Whether you’ll have to pay mortgage insurance

To determine how much to save for a down payment, it’s essential to start with your budget. Understanding your monthly income and expenditures is the ideal place to start. 

Another important consideration is your monthly mortgage payment — how much will you be able to afford every month. Mortgage calculators can be an excellent tool for determining your home buying budget. They can help you calculate monthly mortgage payments based on different down payment amounts and mortgage terms. 

If you’ve been able to save a significant amount of cash in preparation for buying your first home, but your annual salary is relatively low, making a hefty down payment can be to your advantage. By putting a more sizable amount down on your house, you can eliminate paying mortgage insurance and reduce monthly mortgage payments making your mortgage more manageable monthly.

Alternatively, if your savings are small but your income is high, you could benefit from a low- or no-down-payment home loan.

How to choose the right down payment for you

The type of down payment options and associated fees, like mortgage insurance, available to you can hinge on your choice of mortgage. 

Federal Housing Authority

With a mortgage backed by the Federal Housing Authority (FHA), you can borrow up to 96.5% of the home’s value. This translates into a down payment of 3.5%. 

Ideally, your credit score should be at least 580 to qualify to take advantage of this low down payment option. FHA loans also allow borrowers to use financial gifts from family as all or part of the down payment. 

VA Loans

With a mortgage backed by the VA, certain military personal and surviving spouses can get 100% financing on a home’s value. A down payment isn’t typically required to get a VA-backed home loan.

The one exception is when the purchase price of the home exceeds its assessed property value. Other advantages to a VA home loan include no private mortgage insurance premium and closing costs that can be paid by the seller.

Private Mortgage Insurance

Private Mortgage Insurance (PMI) is a type of insurance borrowers can be required to pay on their mortgage. PMI is usually required if borrowers have a downpayment for less than 20% of the home’s value. However, there are exceptions, such as VA home loans (VA loans don’t require PMI) or FHA-backed loans (FHA loans require borrowers to pay a different type of insurance that is often less than PMI). Interest rates affect the affordability of your home. That’s why using today’s mortgage rate is so important to get an accurate calculation estimate. The regional mortgage specialists at River City Mortgage can give you today’s interest rate, answer any home buying questions you might have, and even help you calculate your ideal monthly mortgage payment. Get in touch today.

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