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November 11, 2018

How Much Do I Really Need for a Down Payment?

First-time homebuyers: do you know that a “typical” 20% down payment is no longer required to purchase a home? In fact, many buyers today receive loans and purchase homes for as little as 3% down.

If you’re unsure about where you stand in terms of your down payment, the good news is that there may be several desirable loan options available to you to finance your dream Shawn Forth home. When it comes to your down payment, here’s what you need to know:

Determining Potential Down Payment and Loan

First thing’s first, sit down with a mortgage officer or broker to go over your financials and discuss your options. You may already know that a down payment is a “percentage of your home’s purchase price that you pay up front when you close your home loan,” but you may not be aware of different types of loans and their down payment requirements. A professional can walk you through what to expect in terms of costs, as well as determine the down payment amount and loan type that’s right for you.

When you understand exactly what you’re signing up for, you’re better equipped to make a wise decision for your future. After all, purchasing a home is one of the biggest investments you’ll make in your lifetime — make sure you’re as informed as can be.

Types of Loans for a Range of Down Payments

Conventional Mortgage: A “contract between homebuyers and private lenders,” this type of loan is not a part of a government program. Many lenders offer these loans with down payments ranging from 3%-20% and more. Although a smaller down payment means that you’ll pay more in monthly costs over a longer period of time, with strong credit, you’ll still have loan options available to you.

FHA Loan: Insured by the Federal Housing Administration, this type of loan is especially popular among first-time homebuyers because they allow those with low credit scores (580 or higher) to put down 3.5%. Even if your FICO score is lower than 580, you can still be eligible for an FHA loan. For example, if you put down 10%, you’re allowed to have a score between 500-579. However, the lower your credit score, the higher interest you’ll pay. Click here for a full list of requirements for an FHA loan.

U.S. Department of Veterans Affairs: Those who have served in the military are eligible for a VA loan without a down payment. This type of agreement requires that the veteran in question pay a funding fee of the loan amount up front, which varies in percentage based on certain conditions. The funding fee can also be waived if the veteran has a disability due to his or her service. Because the funding fee replaces PMI, this loan is desirable for veterans — the interest rate on this loan is “likely to be lower than a conventional or FHA rate,” so without PMI, monthly payments can be much lower.

U.S. Department of Agriculture: For those living in rural or suburban areas, a USDA loan may be the perfect option. Like a VA loan, USDA loans don’t require a down payment, so even low-income applicants have the chance to borrow. Issued through the USDA loan program, this accessible loan offers low interest rates in hopes of improving the quality of life in rural areas.

Loan Term Options

Your loan term is the duration of time that you’ll make your scheduled payments. Although 15-year and 30-year mortgages are the most common, many lenders offer loan terms that range from 5-50 years, increasing by increments of 5 years. It should be noted that longer terms typically have a higher rate than shorter ones.

If you’re set for a longer mortgage term, you’ll pay less each month, but will eventually pay more in total interest. Your mortgage officer or broker can help you determine which term is right for you based on your financials.

 PMI For Down Payments Less Than 20%

If you qualify for a conventional loan with a down payment less than 20%, you’ll have to pay Private Mortgage Insurance, or PMI, on top of your principal monthly costs. Because lenders increase their risk by lending you more money to purchase your home, PMI protects them if you default. The lower your down payment, the higher the cost of your PMI.

The duration that a homeowner pays PMI depends on the type of loan they have. For instance, when you reach 20% equity in your home with a conventional loan, you can get your lender to remove the PMI. Although FHA loans don’t require PMI, they do require mortgage insurance premium (MIP), which is paid up front as well as an annual premium in order to close a loan.

Understand Your Mortgage Terms

As one of your biggest and most important purchases, make sure that you comparison-shop for the best option. Devoting time to finding the best possible mortgage can save tens of thousands of dollars in fees and interest over the life of the loan.

Lastly, ensure that you understand what you’re signing up for. It’s not enough to know what your monthly payment is today. You also need to know if the interest rate can change and, if so, when and by how much it will increase. Being comfortable with your loan terms is the best way to ensure peace of mind as you move forward in your home buying journey.

Shawn Forth Homes knows how rewarding it is to purchase a home, and we want our potential homeowners to know about their options. If you’re looking to buy a brand new home in gorgeous Oklahoma City, we’re right beside you every step of the way. For more information on our homes and communities, please give us a call at 405-359-2205.

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