Buying a home is a big deal that generally requires a mortgage. However, it is important to know about strategies that might enable you to maximize your money. With an understanding of some of the advantages and disadvantages of making a large down payment on a home, you will be prepared to make an informed decision.
What is a Down Payment on a House?
The dollar amount that you contribute toward the purchase price of a house is your down payment. When you are buying a home, a lender will usually determine the maximum amount of financing that you are qualified to receive. The amount may be expressed as a percentage of the cost of the house or as a dollar amount.
For instance, if you are buying a house that is priced at $300,000, you might qualify to borrow 95% of the costs for the home. Although, for the same scenario, your lender might provide you with a mortgage loan approval for $285,000.
In both examples, you would be required to furnish $15,000 at the closing of an escrow to fulfill the down payment requirement.
Based on your financial situation and your overall goals, it might be wiser to consider making a larger down payment or a much smaller down payment toward the costs for your home.
Why is a Down Payment Required to Buy a House?
When engaged in mortgage lending, a bank rarely has the desire to assume all of the investment risk. Therefore, an evaluation of your borrowing strength will enable a lender to determine the maximum amount that you are qualified to borrow.
For instance, after reviewing your credit report, rental history or mortgage payment history, your income and the financial reserves that you will have after buying a house, a mortgage lender will inform you of the maximum amount that you can borrow, as well as the amount that you will need toward a down payment.
Lenders like to refer to your down payment as skin in the game. So rather than giving the home seller a check for the full purchase price, a bank may be willing to meet you most of the way. Therefore, your required down payment represents your investment toward the transaction.
Several government-backed loan programs, such as a VA loan from the U.S. Department of Veterans Affairs or a U.S.D.A loan from the U.S. Department of Agriculture provide 100% financing, which means that qualified borrowers will not need a down payment.
What is Considered Too Much for a Down Payment on a House?
While an advantage of buying a house with a low down payment might be for a limited amount of savings, there are other times where a minimal investment makes sense.
Perhaps, you have retirement assets that are providing a better return than using the money toward a larger down payment to buy a new home. For instance, if you are buying a house for $300,000, you would need a 20% down payment or $60,000 to avoid paying mortgage insurance.
However, if you were approved for a mortgage loan with a 5% down payment, you would need $15,000 instead of $60,000. Opting to pay the 5% down payment could leave your money invested for a longer time frame. You might be able to access the $45,000 that you did not use, if a financial hardship occurs. Additionally, the money has the potential to grow into a sizable nest egg over 20 to 30 years.
Ultimately, beyond the mortgage approval requirements, it is up to you to decide how much money is needed for a down payment to meet your financial goals and your comfort level.
Prospect Financial Group is here to help you explore a variety of home financing options.
Contact us today to find out how much money you can borrow to buy a house.
Prospect Financial Group
948 Garnet Avenue
San Diego, CA 92109
NMLS: 349089 | BRE: 01837707
Jason Vondrak has been in the mortgage industry since 2004 and co-founded the mortgage brokerage Prospect Financial Group in 2006 in San Diego, California. Today he serves as President and CEO of Prospect Financial Group and the president and founder of Prospect Property Group, a real estate development company, established in 2012.
“I’ve had the privilege to serve in an industry that exists to ensure homeownership remains among the top priorities of government and citizens alike. Over the years, it has been a pleasure working alongside homeowners, real estate professionals, and business associates combining efforts and teaming up to help homeowners realize the dream of home ownership.”