Many renters spend years saving money to buy a home. While it's not necessary to pay all money for a home up front, most people do need to make a sizable down payment in order to secure a loan. Knowing what the down payment is, which loans require a down payment and how to save money for a down payment can help renters be prepared for the home buying process.
Which Loans Require a Down Payment
Most loans require a down payment of some kind. Conventional loans require the biggest down payment, while loans backed by the Federal Housing Administration (FHA loans) require much less. A typical down payment is approximately 20% of the purchase price of the house. However, not all mortgage lenders or mortgages require a 20% down payment. FHA loans require a minimum 3.5% down payment.
A few loans, VA and USDA loans, require no down payment at all. In general, home buyers who make a down payment of less than 20% on a loan must pay mortgage insurance.
What Mortgage Insurance Is and Why It's Important
Mortgage insurance is a type of insurance that protects the lender when loaning to a higher risk buyer. A higher risk home buyer is usually defined as someone who puts less than 20% down on a home. Mortgage insurance pays the lender for the balance due on the house in the event that the homeowner defaults on the loan.
The mortgage insurance premium is paid monthly, and is typically a percentage of the purchase price of the house. Homeowners pay for the mortgage insurance as a part of their monthly mortgage payment, so that the payment appears to be all one bill.
How to Save for a Down Payment
Saving for a down payment on a home can be a challenge, since a typical down payment can be thousands of dollars. To budget for the down payment, the buyer must set a deadline, determine how much they would like to put down for a home, and then save the same amount each month until they've met their goal.
At the same time, most home buyers must also save for other expenses relating to the home purchase. The closing costs on a home are typically between 2 and 5% of the purchase price of the home. These costs must be covered in addition to the down payment. Leawood home buyers that do not have the money to pay for the closing costs can sometimes get a homeowner to pay some or all of the closing costs for them. However, this is usually only an option in a buyer's market. Buyers must also pay moving costs, which can also be thousands of dollars. In order to find out how much moving costs will be, most buyers must consult with a moving company prior to moving.
When Is the Down Payment Due
The down payment must be made at the close of escrow, when the house transfers ownership from the owner to the buyer. If the home buyer does not have the down payment at the close of escrow, the house cannot be purchased.
Contact a Professional for More Information
If you're a homebuyer who would like to know more about making a down payment, contact a reputable lender. Professional lenders spend a lot of time answering questions for home buyers, to ensure they're fully informed about the requirements to purchase a home. And if you want more information about the home search and purchase process, contact a real estate professional. Your real estate professional can walk you through the home buying process.