Home ownership is part of the ‘American Dream’, and part of making that dream a reality is saving up for a sufficient down payment. Total required down payments are variable; largely dependent on the loan product used -ranging from 3.5 percent to as much as 20 percent of the sales price.
Loan Products
The most salient thing to know about down payments in general is the minimum down payment required for the three major loan products: FHA, VA and Conventional.
FHA: 3.5 percent minimum down payment
VA: No down payment (eligible members and veterans of the armed services only)
Conventional: Between 5 to 20 percent down payment
Getting to your goal
After knowing the required minimum down payment options and selecting a loan product, the next step is getting to the down payment. The percentage of down payment is in direct correlation to the sales price, making it indispensable to know up front how much you can afford before drafting a budget.
Contact a mortgage company and ask for a pre-qualification, or complete a pre-qualification online. This process weighs your income against your stated debt, providing you with a home affordability estimate. It is from this estimate that you will draft your budget.
Examples
If your pre-qualification states you can buy a home with a sales price up to $200,000, your down payment would look like this:
FHA: $200,000 x 0.035 = $7,000
VA: No down payment required
Conventional: $200,000 x 0.05 = $10,000
Saving
Now that you have a down payment amount, it’s time to start saving for it. There are numerous venues for savings accounts; high-yield and certificates of deposit being among the more popular options. Select the option with the highest APR and rate of return over a short period to help fast track your goals.
If you do not already have –and stick to—a monthly budget, it is time to make one, and assign a line item for your down payment in that budget. Experts recommend saving a minimum of 10 to 15 percent of your pre-tax income; use this figure as a guideline.
For example, if you earn $4,000 per month, your savings allocation would look like this:
$4,000 x 0.15 = $600
For a $200,000 home using an FHA loan with a 3.5 percent down payment of $7,000, it would take you approximately 12 months to save enough for your down payment. Of course, the more you save, the faster you have the money for your down payment.
Added Expenses
The down payment is not the only expenditure associated with a home purchase. There are closing costs and moving expenses you need to account for as well. Because of this, many experts recommend taking the minimum recommended down payment of your pre-qualification and doubling it, in order to cover all of the costs associated with home buying. While there are exceptions for every rule, being over prepared in a home purchase is never a poor decision. Speak with a mortgage broker or real estate agent for all of the ins and outs of closing costs and available options.