New Jersey Real Estate Tips September 30, 2014

How Much of a Down Payment Do I Really Need?

If you’re planning on purchasing a home, it’s important to know the facts regarding down payments. First-time buyers are often surprised to learn how much they need to put down, especially in today’s returning market. The good news is that there are many options available that may fit your current situation. Homeownership is still the American dream, and if you’re tired of paying someone else’s mortgage, buying a home may be right for you.

20% Down Payment Industry Benchmark

In the mortgage industry, 20% down is considered the benchmark down payment. A 20% down payment looks good on paper and indicates financial security. But, what if you don’t have this much cash to put down on a home? With the high cost of rent, you may not have been able to put much away, but are still able to make mortgage payments. Fortunately, 20% down is not a requirement, nor expected in many cases.

What Other Down Payments are Available?

For an FHA loan, which is backed by the Federal Housing Administration, the minimum down payment is 3.5% down. An FHA loan is a nice option for first-time buyers who don’t have a ton of cash, and the loan requirements are typically more flexible. The one thing to be aware of is that FHA loans carry a monthly mortgage insurance payment, which can add significant dollars onto your payment each month.

Another popular option for homebuyers is to put 5% down and still secure a conventional mortgage. And, with a conventional loan, you may be able to get rid of the private mortgage insurance after accumulating 20% equity in a minimum of 24 months.

What if You Don’t Have a Down Payment?

Some buyers simply have nothing to put down, but this doesn’t mean that purchasing a home is out of the question. The Department of Veterans Affairs does offer a program where the homebuyers don’t have to put anything down, but it’s available only to military veterans, and the home must pass a clear pest report.

A second option is through the Department of Agriculture, USDA. You don’t need to be a veteran for this loan, but it’s only available for homes that are designated rural by the USDA.

Your best option is to meet with a realtor or loan officer who can inform you of your loan options and what down payment will help you secure a home loan.