How Much Down Payment Do You Need?

We’ve all heard that down payments can range from 5 percent to 20 percent. The more we put on say, a $250,000 loan, the lower our payments will be. However, if cash flow is low, we can do a small 3.5% down payment.

The amount of down payment necessary when buying a home depends on the kind of loan you apply for, such as a government loan like an FHA or VA loan, or a conforming loan from a private institution. With non-conforming loans (aka “jumbo loans”) the down payment required can be up to 20%.

Below is an article extracted from AOL Real Estate that talks about what you’ll need to do before you can make an offer on your dream home!

According to expert Todd Dal Porto, Home Loans Enterprise Sales Executive at Bank of America, FHA loans are a popular option.

FHA loans are a great way to get your foot in the door with a low down payment, says Dal Porto, as the minimum down payment requirement is only 3.5 percent of the mortgage amount you’re seeking. It amounts to a 96.50 percent loan-to-value amount — but he points out that there’s a cap on the value of the home, and that is set county by county. The cap exists mainly because affordability varies in a given area. Los Angeles County, for example, is currently capped at $729,750, whereas most counties around Nashville are capped at $432,500. (See where your county stands.)

Another good thing about FHA loans is that they’re open to anyone, regardless of income. Because even those with a higher income might not necessarily have the savings for a sizable down payment. However, FHA does watch your credit score, as would any lender. It may even soon implement a minimum FICO score of 580.

Which down payment strategy best suits your budget?
Start low — 3.5% on an FHA loan with higher mortgage insurance charges. 2182 (32.0%)
Mid range — 5-10% on a conforming loan means lower PMI payments. 1684 (24.7%)
All in — 20% down payment to eliminate the cost of PMI. 2950 (43.3%)

Dal Porto also points to VA loans, which are available for eligible military veterans, and have a zero-down-payment option for 100 percent of the loan-to-value, provided that the loan is no more than $417,000. For higher loan values, a down payment would be required and would vary based on the appraised value or purchase price.

Conforming loans, which can have a fixed or variable interest rate — although most borrowers choose a fixed rate — are given out by private lenders, such as Bank of America. Lenders set their own minimum guidelines for this product, but currently Bank of America requires a minimum of a 5 percent down payment for loans up to $417,000 and 10 percent for loan amounts up to $729,750.

There are some exceptions to the minimum down payment, however. A down payment of 3 percent may be allowed if the borrower’s income is below the HUD median income for the area where the home is located. And, borrowers can also use a down payment assistance program to have a third-party cover all or part of the down payment.

Given the varying options for a down payment requirement, that doesn’t mean that you should go out and plunk down all of your savings on the down payment. Dangani and Melinda moved from Missouri and asked the experts how much cash they should keep in reserve.

The simple answer, says personal finance expert Lynnette Khalfani-Cox, is to not overextend yourself. Homeownership comes with a lot of hidden costs, from the property taxes to homeowners insurance and repairs. And don’t forget that you’re going to want to decorate. All these costs can add up to thousands of dollars more than you planned.

It’s not fun to be house poor — whether you’re young, or retired and living in Florida. Make sure you consider the list price of the house, your down payment and your remaining savings carefully, so that you don’t end up letting your house own you instead of you owning it. That would truly be uncomfortable.

View the original article here: http://realestate.aol.com/blog/2010/07/02/how-much-down-payment-do-you-need/

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