First-Time Home Buyers Guide: Part 3 of 15
Don't Sweat the Small _____
One of the biggest concerns and hurdles many renters have about becoming homeowners is the need for a downpayment. Many feel like they have too small of a down payment and couldn’t be approved for a mortgage because of that.
Don’t sweat it if you only have a small down payment...
True enough, for the most part you need to have some money saved to use as a downpayment and for “closing costs.” But it doesn’t usually have to be 20% of the purchase price like it once was. That kind of down payment can be required for some buyers, depending upon their situation, but many buyers — even ones who are not buying their first house — put less money down.
Sure, the more you put down, the lower your monthly payment will be. But waiting to buy until you save up more money can actually cause more harm than good. It can be tough saving up enough money to make much of a dent in the monthly payments, especially when mortgage interest rates are low. And if house prices are going up, you could literally lose money by waiting and saving money.
How much money you have on hand will affect how much you are approved for and what kind of loan makes the most sense for you, but there are plenty of options out there.
If you have around 10% of your target purchase price saved, 5% for down payment, and 5% for closing cost, you will be in good shape for a conventional loan without having to get closing cost consessions to make a deal work (which are hard to get in this market). There are loan programs that allow less down and sometimes seller contributions to closing costs are possible.
Make sure to ask your prospective lender to recommend the best loan for you and your situation. They should be willing, able, and glad to explain the different options to you, but sometimes they don’t think to give you all of the options when you call for a pre-approval. They just crunch the numbers and give you a basic pre-approval. So, make sure to ask during that phase of the process. The earlier you know all of your mortgage options, the better decision you will be able to make.