Of all the things a first-time homebuyer must prepare for when trying to secure a home mortgage loan, saving for that inevitable down payment may be one of the most essential.
If you are unfamiliar with it, a down payment (or “D-word”) is a percentage of a home’s purchase price that a buyer pays up front when closing on a home mortgage loan. In essence, it is a large chunk of money a person must pay to help satisfy the terms of a mortgage and put a lender’s mind at ease before closing.
But before we go further into the role a down payment amount can play in the home buying process, there really is no way of underscoring just how important it can be — especially for a first-time homebuyer.
The biggest and perhaps most important aspect of a down payment is the amount. Lenders, large and small, all agree that the amount of a down payment can and will play a key role in finalizing a home mortgage loan. Why, you may ask? Because a lender will often look at a down payment amount as a first-time homebuyer’s investment in their future home.
Typically, homebuyers will have to pay down payments that equal 5–25% of the total value of a home, according to Investopedia. But it really all depends on what type of mortgage you want. For instance, a first-time homebuyer may want to look into an FHA mortgage loan because they often require a minimal down payment. If you’re a veteran, a VA loan may be the way to go because it involves no down payment whatsoever.
Ultimately, the amount of a down payment a homebuyer chooses to use will have a direct impact on their mortgage moving forward. Let’s take a look at the types of down payments a first-time homebuyer can use to leverage the most out of their home mortgage loan.
A “smaller” down payment
Let’s be honest, there really is no such thing as a “small” down payment when it comes to buying a house. But, even still, it’s important to remember that putting down less money up front will likely result in more strings being attached to your home mortgage loan. Lenders will often require a first-time homebuyer to secure insurance on low down payment loans, according to the Federal Citizens Information Center publication “How to Buy a Home With a Low Down Payment.” A lender will likely require insurance for protection purposes — say, just in case the homeowner fails to make his or her payments.
“Low down payment mortgages are coming back around as the housing market improves. Buyers can, once again, get a mortgage with as little as 3.5 percent down, especially on a Federal Housing Administration mortgage. (Some government programs even offer 0 percent down mortgages)” – How Much Will That Low Down Payment Cost You?
Also, in order to be considered for a home mortgage loan with a low down payment, a buyer will likely need to prove they have enough income to support what will generally be a higher monthly mortgage payment as well as a good credit background.
A “bigger” down payment
Again, pretty much any down payment is going to be considered big — especially to a first-time homebuyer. However, as a general rule, the amount a buyer ends up putting down up front will have a direct impact on the size of their monthly mortgage payments — meaning more money in their pocket month-to-month.
“For example, on a 30-year mortgage at 5% interest, putting an extra $10,000 into the down payment will save you $9,325 in interest payments over the life of the loan.”- 5 Reasons to Save for a Big Down Payment
A bigger down payment can also mean a lower interest rate, no mortgage insurance fees, and a lender more willing to overlook credit blemishes.
The idea of a down payment, no matter the size, may seem scary, but rest assured, there are many ways first-time homebuyers can get the home they want with the money they have available.
No matter if you’re a first-time homebuyer or you’re simply looking for a low down payment mortgage, we offer a variety of programs at Blue Water Mortgage that can assist you in the home buying process. Contact us today!