What You Need to Know About Down Payments
For better or for worse, making a down payment is an essential part of almost every home buying experience. Because most people don’t have tens or hundreds of thousands of dollars readily available to buy a home, buyers typically need to go to either a bank or a loan agency for help. Whomever the buyer goes to will ask that they have a down payment prepared, which is a set amount of money the home buyer needs to have prepared upfront before they can purchase a home. Before rushing to the bank, here’s some things to remember when it comes to making a down payment.
How Much Does a Down Payment Cost?
The average loan agency will ask that a home buyer pay 20% of the home’s total cost up front, so if a home is valued at $300,000, the appropriate down payment would be $60,000, and the remaining money will be loaned to the buyer by their bank or agency of choice and become the buyer’s mortgage to pay back in monthly increments, and because the money is being loaned, the buyer will also have to pay interest on it.
Can I Pay Less Than 20%?
Yes. It is possible for home buyers to pay as little as 3% as a down payment. These down payments are particularly attractive to first time home buyers––be they in Ashburn or elsewhere––because they’re more affordable compared to a 20% down payment, particularly when they don’t have the profits from a prior home sale to apply to the down payment. However, such a low down payment comes with disadvantages as well as advantages.
For instance, although a 3% down payment is far more reasonable, it also means that home buyers often won’t find someone willing to loan them as much money as they would with a 20% down payment, which in turn means home buyers will have to take a lower budget into account when house hunting. A low down payment can also mean the buyer will have to pay higher interest costs on their mortgage each month. Buyers who go with a lower percentage down payment may also have to pay fees such as mortgage insurance premiums (MIP) or private mortgage insurance (PMI), though buyers who take such a route, with the exception of those who use FHA loans, may have their PMI canceled when they own 20 percent of the equity in the home.
Is it Possible to Buy a Home Without a Down Payment?
Yes. There are several types of loans created by the US government specifically for certain groups of people to make home buying more accessible and encourage people to move to certain areas.
The first of which is a Veterans Affairs loan, also known more commonly as a VA loan. These loans are available to all veterans and active members of the US military. There are also different subtypes of VA loans to help specific types of people, such as Native Americans who want to purchase land on a reservation, or veterans who need a home that’s disability accessible.
The United States Department of Agriculture (USDA) also offers its own loans that allow the purchase of a home with no down payment. People who want to move to a rural area can apply for a USDA loan, which incentivizes people to move to these areas and helps build the economies there.
It’s important for home buyers to know all their options for putting down a payment (or if they’re eligible for exemption) on a home. Large financial decisions should never be made lightly, so make sure to investigate all options thoroughly and seek expert advice from a trained professional if necessary.