Jun 12, 2018 / Homes
The sticker shock of buying a new home can be extreme. On top of the actual purchase price—which likely includes several more digits than just about anything you’ve ever purchased—you’ll have to pay insurance expenses, closing costs, property taxes, utility and repair expenses, and the list goes on. Luckily, many of these costs can be rolled into your monthly mortgage payment. But to qualify for a loan, you’ll have to come up with at least a little cash up front. Here are a few things to consider when deciding how much to put down on your new home.
Most lenders like to receive at least 20% of the home’s sale price or appraised value as a down payment. If you already had sticker shock, consider that 20% of a $300,000 home is $60,000. That’s a lot of money to pay upfront, but there are benefits to coming up with that much cash. Typically, the higher the down payment you make, the lower your loan amount and interest rate will be. And, you’ll have more immediate equity in your home.
The Federal Housing Administration (FHA) is a government agency that helps homebuyers get approved for loans. The FHA guarantees a portion of the loan, which means interest rates are generally lower. But because the loan is considered riskier, consumers are required to pay FHA mortgage insurance, which is usually .5% to 1% of the loan amount annually. One of the best things about an FHA loan is that they typically require a smaller down payment of around 3.5% to 10% of the home’s sale price or appraised value.
For a conventional mortgage, most lenders require a down payment of at least 5%. But by paying less than 20%, you’ll likely have to get private mortgage insurance, which adds to your monthly mortgage expense.
There are other loan programs, including some sponsored by companies like Fannie Mae and Freddie Mac, available to creditworthy borrowers that require down payments as low as 3% of the home’s sale price or appraised value. Still other programs, including loans sponsored by the Department of Veterans Affairs and the Department of Agriculture, guarantee zero-down payment loans for qualifying borrowers. And right now, Utah First is offering mortgage loans with just $6,000 down and no mortgage insurance required for qualified members, providing a low down payment option without adding extra expenses to a monthly mortgage.
No matter how you look at it, buying a home is expensive. And having to come up with a down payment only adds to the burden. If you’re ready to start the home-buying process and want to learn more, check out Utah First’s Home Ownership How-tos for more answers to common homebuyer questions.