When you are looking through available home listings in Coastal Virginia, you may be wondering what it would take to buy a home.
Most of us purchase real estate through mortgages. It is a faster process than working to save the total value of the home to purchase it outright. However, mortgages come with interest rates and other fees.
To keep costs to buy your home as low as possible, you’ll want to make some basic decisions about the amount of the loan you get. Specifically, the down payment.
What Is a Down Payment?
To buy a home, you need to show the lender some level of commitment in the purchase. While it is still possible to find a zero down payment mortgage loan, such as a VHDA or VA loan, but this isn’t usually the best option for today’s typically home buyer. Instead, your typical home buyer has to have some money for a down payment. This is normally the out of your pocket cash need to purchase the property. This is not a function or portion of your mortgage and it cannot be borrowed funds, however, under some circumstances it can be a gift from a relative. A down payment is just that. It pays down a fraction of the sale’s price of the home and allows you to mortgage or get a loan for the balance.
Let’s consider an example, if you decide to purchase a property selling for $250,000, using your VA benefits there will not be a down payment. However, if you are not an eligible Veteran and are considering a down payment of $50,000 the remaining $200,000 plus fees are then paid to the home seller through the proceeds from the mortgage.
How Much Down Payment Is Best?
There is one rule to remember here. The more money you put down on the home, the less expensive the home will be for you over time. That’s because there is less mortgaged and that means less interest you pay overall. So, the more you can put down the better.
Most lenders require a down payment. If you are getting a conventional mortgage, for example, the lender may require between 5 and 20 percent of the home’s sale price to be paid in the form of a down payment. If you obtain an FHA loan, this number drops to about 3 percent. You can always pay more, just not less. For those obtaining a VA loan, there is no down payment requirement for those who qualify.
What is Mortgage Insurance?
Minimum down payments are just that – the least amount you should put down. However, if you make a down payment that is less than 20% of the sale price, you as the buyer, may be required to purchase private mortgage insurance (FHA insurance or private mortgage insurance). These almost always require premiums paid each month to protect the loan or mortgage balance from default.
Qualifying for an Expensive Home Purchase
Another reason to make a large down payment on a mortgage is because it can help you qualify for a higher-priced home. Consider this, your bank or Mortgage Company has approved you for a mortgage loan up to $200,000, but the home you want is $225,000. You may be able to put down that extra $25,000 to make the bigger purchase — as doing so will reduce your monthly debt to income ratio. (Your debt-to-income ratio is all your monthly debt payments divided by your gross monthly income. This number is one way lenders measure your ability to manage the payments you make every month to repay the money you have borrowed). It all comes down to how much you want to spend each month for mortgage payments. The larger the down payment, the less you pay each month and the larger down payments also reduces the loan amount.
What Is Right for You?
It is a good idea to speak to your real estate agent and lender about down payment requirements when you are ready to purchase your home. Keep in mind that home sellers like to know buyers have strong down payments, as it demonstrates that they are serious as-well-as financially secure.
A balance between having enough in savings and making a large down payment can be tricky, but with careful planning, you will be able to buy the home you want. As a potential buyer, be sure to talk to a well qualified mortgage professional well in advance.
Bobby Fenner is a Full Time Realtor with over 30 years experience in the Virginia, Maryland and Washington, D.C. Real Estate Markets. He and his team of Real Estate Pros offer the highest level of service. If you’re buying or selling a Coastal Virginia home, call (757) 439-5779 or email [email protected]. We’ll be happy to assist you in your move.