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First-time homebuyers are often bombarded with advice when they’re looking for their dream home. One of the most asked topics revolves around determining the right down payment amount. Twenty percent of the purchase price of the home used to be the gold standard, but today, the real answer depends on many factors.
The first step you should take is to consult with a mortgage professional to discuss your home loan options and future goals. Looking at your future financial goals will help determine what down payment options might be available. Here are some things to keep in mind.
- Your financial situation
Give your mortgage professional a full picture of your financial situation by gathering and sharing your financial assets and liabilities. Also be prepared to talk about your financial goals over the next five to 10 years if you plan to stay in your new home for that long. Then build out a plan on how much you think you’d like to put down on a new home. Consider additional moving costs and incidental spending.
- Closing costs
When purchasing a new home, you’ll need to factor in closing costs as part of your overall budget. These costs will impact your down payment budget. A mortgage professional can assist you with this, but a general rule of thumb for estimating closing costs is to calculate 2% to 5% of the average home price in your desired neighborhood.
- Large versus small down payments
A larger down payment will likely lower the cost of your loan. However, that doesn’t mean that a large down payment is for everyone. Many loan types require a 5 percent down payment or more. With that in consideration, you can often expect to save with at least 10 percent of the home price as a down payment. This 10 percent mark could be a good estimate to think about when looking at homes and determining how much home you truly want to purchase.
- Low- and no-down-payment options
Depending on your current status, you could qualify for special programs that offer low- and no-down-payment options, alleviating the burden of needing dispensable cash to put toward your home. These programs include the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA), and the U.S. Department of Agriculture (USDA).
Securing your down payment is the most important step in finding the perfect home loan for your needs. Contact a home loan officer today and learn more about the home buying process here.
