Before we get into the numbers, what exactly is a down payment? A down payment is a lump sum of money a home buyer puts towards the overall cost of their home. Down payments are provided upfront, and are not recurring. Essentially, a down payment is a portion of the total sales price of your home. A down payment offers an extra level of security, and often indicates to both homeowners and mortgage lenders, that a buyer is serious about making a purchase. Generally, the larger the down payment percentage, the more ideal the buyer becomes.
The industry standard for down payments is 20%. When purchasing a home, being able to provide 20% for a down payment will position you optimally. Not only does this indicate to mortgage lenders that the buyer is serious, but it demonstrates the buyer’s ability to save money strategically. In most cases, this will be your best course of action, and will be universally preferred by mortgage lenders to those who cannot provide 20%.
Money for a down payment can come from several sources. Typically, your down payment will come from your own savings, and/or money you’ve accumulated over time. Any money that you have legally procured, regardless of origin, is fair game for a down payment. This means, money you’ve received from family, employers, grants, and nonprofits can be sequestered and put towards a down payment.
Lenders will typically require 20% for a few reasons. Any time a lender takes on a new client, they are assuming a level of risk. Even if the client looks good on paper, and the risk factor is relatively minimal, lenders still need to exercise a degree of caution. However, providing 20% down does not solely benefit the lender. Putting more money down will ensure, you as the buyer, have access to better funding, and higher loan rates, on average.
While 20% down is ideal, there are other financing options available if you need them. Realistically, providing less than 20% does create roadblocks, however, there are loans available that can help bridge the gap in certain circumstances. If you are unable to make an upfront payment of 20%, you will be required to pay for private mortgage insurance (PMI). While PMI can help alleviate pressure upfront, you will still be on the hook to make payments long term. A PMI is not advisable for those looking for a quick fix, or an opportunity to bypass certain payments. You will still be required to pay reparations over time.
Is it possible to receive 100% financing? The short answer is yes, but 100% financing is only available for very specific subset of individuals. Generally, the only time one will be eligible for such financing is through government funding. This type of funding is provided through the United States Department of Agriculture (USDA) or through the VA (veterans affairs). If you are a veteran of the United States military, you will not be required to provide a down payment. While the government does not directly provide loans for veterans, private lenders will be required to honor this agreement. Before you go and make that offer on your dream home, remember there are requirements you must meet to ensure eligibility for such financing:
- 90 days or more in wartime
- 181 days in peacetime
- 24 months or the full period for which you were ordered, if now separated from service.
- 6 years, if in the national guard or reserves.
It is important to note that those who have been dishonorably discharged, will not be eligible under any circumstance for 100% funding. If you have any further questions, or are still unsure if you meet the basic requirements, speak with your lender.
If you don’t qualify for 100% financing, your best course of action is to map your finances and create a game plan. Because 100% financing is only available for a small percentage of homebuyers, most buyers will benefit from doing a thorough inventory of their finances. If you are able to put down 20% comfortably, you are likely in an ideal position to proceed in the homebuying process.
Generally, being debt free is optimal, however, having debt will not automatically disqualify you from getting decent lending. Buying a home and making mortgage payments is typically considered more lucrative than paying rent. However, this does not account for the surprise costs that come with owning a home. If you are currently financially insecure, you may want to consider postponing a home purchase. You will typically find the process of getting approval, and subsequently a decent loan, easier, if you have minimal to no debt, and a sizable chunk of savings procured. Above all else, make the choice that best benefits you financially.
Speak with your lender about further opportunities for financing. A reputable lender will often be able to provide you with opportunities for financing breaks. You may be surprised by what you qualify for. Don’t be afraid to ask questions, after all, you are your best advocate.