Buying your first home is a significant milestone. But how do you know if you're…
One of the first questions that tend to arise for prospective home buyers relates to the down payment. Determining what percentage you want to put down on your home can be tricky. It’s important to remember, first and foremost, that every individual’s situation is unique. What might have worked for one home buyer may not be the right route for you.
So how can you determine what down payment is right for you? Let’s take a look at the key factors you should consider to help you make this important decision.
Gather Your Relevant Financial Information
The first step for any prospective home buyer should be gathering all of their relevant financial information. Make sure you have a clear and full understanding of the current status of your personal finances. How much do you have saved? How much do you have invested? What is your credit score? Can you count on a steady income for the foreseeable future? What are your major expenses? It is crucial that you answer these key questions before you move forward in the process.
Account For Hidden Costs
Once you have a clear picture of your current financial status, it’s time to begin constructing a budget. While most prospective home buyers account for the major factors like a down payment and mortgage payments, it’s important to also consider the hidden costs of homeownership.
There will be additional costs to both close the sale of your home as well as costs to maintain your home. When you’re considering how much of a down payment you can put down and how much you can afford to pay monthly toward your mortgage payment you’ll need to add in these hidden costs.
So, what exactly are these hidden costs and how can you estimate them? You’ll want to talk to an experienced real estate agent about the closing costs in order to finalize the deal of your home.
Real estate agents can help give you a better understanding of what to expect for your individual situation. In addition, you’ll need to do some research on property taxes in your area so you can add these costs to your budget. Finally, reach out to someone who owns a well-maintained property that is similar to the one you are interested in purchasing. Ask them how much they put towards the maintenance costs associated with their home on a monthly basis. Make sure that you add this to your monthly budget.
Consider Your Options
With a clear picture of your financial status and an in-depth understanding of the hidden costs of buying and owning a home, you can now begin to consider your house down payment and mortgage options.
Prospective home buyers often believe that they need to put down a 20% down payment in order to buy a home. In fact, a recent study found that one-third of prospective home buyers believe that this is true. This discourages many people from even considering their homeownership options. This is especially unfortunate, as the reality is that most people do not put down a downpayment of 20% on their home. According to the National Association of REALTORS, the average down payment size is actually closer to 7%.
Of course, the more money you are able to put down on a home, the lower your mortgage interest rate is likely to be. This is certainly an added bonus of a high percentage down payment. Additionally, putting 20% down on your home will prevent you from having to obtain and pay for Private Mortgage Insurance (PMI). However, it is absolutely possible to buy a home without a 20% down payment. In fact, depending on your individual financial situation, it might be incredibly risky to empty your savings account in order to put down a 20% payment on your home. So, don’t make a down payment that will get you in over your head and explore your options thoroughly before making a commitment.
Even if you are organized and knowledgeable, it can be very difficult to compile all of your financial information and find a way to make sense of all of the numbers. This is where Home Lending Pal can help! Our AI-powered mortgage advisor, Kev, can combine all of your relevant financial information to generate a mortgage score. Your mortgage score shows your anticipated approval odds for the homes that you add to our system. It will give you advice early on in the process before you even apply for a mortgage so that you can do so with confidence.