Are you looking to buy a house? This usually depends on how much down payment you have put aside. If this is your first time buying a house, you may have many questions regarding down payment and may not understand why it is important. After all, buying a house can be complicated, especially if you have no idea how to get started.
Simply put, when you decide to buy a house, you have to pay a down payment to the mortgage lender. This is a portion of the price of the house that needs to be paid upfront. It is essential because a down payment shows lenders that you will buy the house and are committed to it.
Down Payments and Mortgage
Your mortgage is affected by how big or small your down payment is. For example, if your down payment does not match 20 percent of the house purchase price, you must be willing to pay for PMI- private mortgage insurance. This insurance helps keep the lender protected in case you default. You can prepay the amount for an entire year or pay it monthly along with your mortgage bill. The price of PMI is usually between 0.5 to 1.0 percent of the price of the house purchase. This means that if you buy a house for $200,000, you will have to pay an additional amount of $85 to $165 every month.
Of course, how high the payment you will give each month depends on the size of your down payment. If you put down more money, you will not owe too much on the mortgage, which means that your payment will also be low. With a larger down payment, you may also not have to pay a high-interest rate. Moreover, the bank will also not consider you as big of a risk as opposed to someone who only puts down a tiny amount.
Here are some rules most lenders follow when making the decision to approve your mortgage. This is called the 28/36 rule:
- The housing costs, as well as the future mortgage, should not be more than 28% of an individual’s total monthly income.
- The debt payments meant to be paid each month should not exceed 36% of an individual’s monthly income. This number is known as an individual’s debt-to-income ratio.
For example, the median monthly income most individuals earn in Maine is $4,634. Here is how you can calculate a mortgage payment based on this:
$4,634 x 28% = $1,298.
Do You Really Need 20% Down to Buy a House?
A long-term mortgage, such as a traditional 30-year fixed mortgage rate, calls for a down payment of 20%. This may seem like an impossible amount to save up in some real estate markets. Luckily, some programs have been established through which borrowers can contribute a smaller amount.
Fannie Mae and Freddie Mac is a government-sponsored entity that supports homeowners by backing their mortgage loans. These loans are government-guaranteed and require a down payment of only 5 percent. If there is a conforming loan, a borrower is supposed to meet a set of credit standards. Moreover, he must ensure that the price at which the home is meant to be purchased is not more than the conforming limit.
The Federal Housing Administration (FHA) offers some loans which allow customers to pay a down payment of 3.5% as well. Of course, customers will have to meet the minimum requirements of a credit score, and they must have mortgage insurance.
Veterans can qualify for a VA loan without having to pay any down payment. Even though credit standards and income are not important, veterans must meet some debt-to-income ratios.
Usually, no mortgage loan can be achieved without a down payment. Even though the bigger the down payment, the better it is, there are some loan programs that cater to fit the masses.
For more information about down payment and mortgage, click here.
Integrity Mortgage (NMLS #1692497) can help you with your FHA needs. Contact us to learn more.