If you are planning to buy a home in the future, you will likely be able to finance the majority of the purchase. However, you will also likely need to put money down before the transaction can officially close. Let’s take a closer look at down payment options that may be available as well as where you might be able to get the money to make it.
Should You Put Down 20 percent?
According to Craig Bosse, many new homeowners discover they need extra funds for repairs, so putting a smaller payment down can give you more flexibility after closing. Of course, putting less than 20 percent down could mean that you have to purchase a private mortgage insurance (PMI) policy. The policy protects the lender in case you default, and the premium payments are equal to 1 percent of the purchase price per year. Another good reason to make the largest down payment possible is that you instantly build equity in your property. A financial advisor may be able to help you decide how much to put down and how it could impact your payment over the life of the loan.
Lowering Your Down Payment
Government mortgage products such as VA, FHA, and USDA loans may allow you to buy a home with down payments as low as 3.5 percent. In some cases, according to the US Department of Veterans Affairs, those who use USDA or VA loans won’t have to make a down payment at all. If you are buying a home with a conventional mortgage, a lender may allow you to put less than 20 percent of the purchase price down. This may be true if you have a high credit score, a low debt-to-income ratio, or other qualities that lower your borrower risk profile.
Funds Could Be Gifted
Some or all of a down payment associated with a government loan could be gifted by a friend, family member, or colleague. If someone does make a gift, he or she will need to sign a form stating that he or she is not buying an equity stake in the house. That person making the gift will also need to prove where the money came from before the payment is cleared.
When making a down payment, be sure to find a balance between building equity in your home and preserving your short-term financial security. If building equity quickly is a top priority, you can always make larger mortgage payments in the future when you are financially secure enough to do so.
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