Your down payment is one of the most important parts of buying a property, but many prospective homebuyers are unsure about how the down payment can impact other aspects of the homebuying process. The more you understand how your down payment plays into the quality of home loan packages you’ll be offered, the better deal you’ll be able to get.
Let’s take a look at some of the most frequently asked mortgage questions so you can be better prepared for what to expect.
How much of a down payment do I need to buy a home?
Technically, there are deals that exist where you can buy a home with no down payment at all, which many people will bring up when asked about what down payment is “essential” to secure a home loan. This sentiment, however, oversimplifies the situation.
For a traditional mortgage, you ideally want to have 20% of the purchase price of the home paid for by a down payment. This means you begin your home purchase with 20% equity in the property. When you do this, you won’t need to secure private mortgage insurance for the property. Your application looks very strong at the bank. You will be offered some better deals, namely in regards to things like interest rates.
While this is the most common question about mortgages, the answer isn’t cut and dry. It is true that 20% is ideal, but there are many mortgages secured with much less than this. Veterans can often apply for various programs with zero percent down payments. An FHA (Federal Housing Administration) loan can be secured with a 3.5% down payment. In general, a larger down payment will be more beneficial in the long run, but there are various options when it comes to making a down payment, securing a non-traditional loan, or obtaining financial assistance.
How does my down payment affect my interest rate?
The higher your down payment, the stronger your application. Lenders look at your down payment, and if you have put around 20% down, they will likely feel more secure that you are able to manage your finances well. For a lender, this reads as a sign that you are more likely to make your mortgage payments on time.
With strong application indicators like a high down payment, you become a more desirable applicant, and that means lenders will often offer you a lower interest rate on your mortgage to secure your business with their company.
What does my credit score have to do with my down payment?
Two of the biggest factors on your mortgage application are your credit score and your down payment. When you have a higher down payment, this can help make up for a lower credit score. With a high credit score and a high down payment, you can secure an even better interest rate on your home loan.