When you’re wanting to purchase a new home, you’ll undoubtedly be concerned about how much to pay down on the property. After all, a down payment affects your interest rate and how much home you can afford.
If you haven’t been able to squirrel away a hefty savings, you may be considering trying to borrow money for the down payment. While this is an option, you may be better off shopping around for a mortgage loan that requires either a smaller down payment or 100% financing options.
Knowing all your choices is the first step toward making a good decision. Here are some home loan programs that may benefit you, even if you haven’t saved a big down payment.
Federal Housing Administration (FHA) loans require much less than the 20% down most conventional loans do. Consumers who qualify for FHA loans typically only have to put 3.5% down. This smaller down payment can help hopeful homebuyers purchase a house faster than if they had to save for years.
Veteran’s Affairs (VA) loans are open to eligible active duty and veteran military men and women and, in some cases, their spouses. VA loans offer borrowers low down payments or 100% financing options for their new property.
U.S. Department of Agriculture (USDA) loans are another viable option for borrowers who don’t have a large down payment saved for purchasing their home. If the homebuyer is purchasing a property in a rural area, a USDA home loan may include 100% financing options for eligible applicants.
What a Lower Down Payment Means
Paying a smaller amount down, or taking advantage of the 100% financing option, affects other aspects of your mortgage loan. Weigh these into the mix when you’re deciding if you want to go with a program that offers a lower down payment.
- Higher monthly payment. Making a big down payment means you finance a smaller amount with your mortgage loan. The more you pay down, the lower your monthly payment will be. If you’re leaning toward a smaller down payment, make sure your budget can handle the bigger monthly payment.
- PMI insurance. Some, but not all, loan programs that let you make a smaller payment down require private mortgage insurance (PMI). This ensures that lenders will receive their money if you default on your loan. PMI is expensive and typically increases your monthly mortgage payment. The good news is, when you have built up equity in the home, you can refinance it and get PMI removed.
The homebuying process is packed with choices, and your down payment amount is a big one. Deciding how big of a down payment to make on your property takes careful consideration. It all boils down to how much you have saved, how long you’re willing to wait to build up a down payment, and the types of loans you qualify for. Talk to an experienced loan officer to understand all of your options.