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Down Payments 101: Everything First-Time Homebuyers Need to Know
Buying your first home can be daunting. The ever-shifting markets, fluctuating interest rates, and economy at large often combine. They can turn what should be a fun and exciting experience into a hopeful homeowner’s worst nightmare.
If the down payment process is still a mystery to you, you’re not alone. Fortunately, Direct Home Loans is here to answer all your burning questions.
Why Are Down Payments So Important?
First-time home buyers often report that the down payment is the most challenging hurdle to overcome when starting the process of looking for a home. While it is not impossible to obtain a mortgage without a down payment, the more you put down upfront, the stronger position you’ll have in securing a loan.
For example, saving up for a down payment will demonstrate to your potential lender that you are financially forward-thinking and probably readier than most for the responsibility of a mortgage. Since your mortgage payments are likely to be higher than your current housing costs, the ability to save is a quality the bank will take into consideration.
Another important reason to opt for a down payment is it serves as a safeguard in the event you need to move during an unfavorable shift in the housing market. Selling the home you purchased without a down payment is usually difficult, because you often owe more than the home is worth.
There are other, more personal benefits to putting down money upfront. Practically speaking, a sizable down payment will affect your monthly payments down the line. Also, putting so much of your personal finances into your mortgage will likely prevent any nagging feelings of buyer’s remorse.
No home buyer’s financial situation is completely identical to anyone else’s. You should carefully consider all your options when debating whether or not to utilize a down payment in your housing search.
How Much Should I Put Down?
Traditionally, a down payment should be 20% of the potential mortgage. However, there are many programs out there that allow first-time homebuyers to put down less upfront in order to secure their loan. These programs often have more stringent qualification requirements, so you should carefully consider which plan is right for your finances.
In these cases, you’ll probably need to have a higher credit score. There will likely be a maximum debt-to-income ratio that you cannot exceed in order to qualify. The debt-to-income ratio is a tool that lenders use to determine how much of your monthly income is spent on debt. Since a mortgage would be adding to the debt, your bank will want to be sure your income can support it.
Make sure to keep in mind closing costs when you’re calculating how much you will want to put down. These are fees that are due at the time you close on your house in addition to whatever amount you are setting aside for your down payment.
First-Time Buyer Down Payments Tips and Tricks
If you are just starting out on your home buying journey, the idea of saving up for a down payment might be a little intimidating. Fortunately, there are lots of ways a hopeful homeowner might increase their odds of success.
In the US, every single state has what is known as a down payment assistance program. The assistance might depend on where you live and how much you make. However, these programs are invaluable for first-time home buyers. Many of them also cover closing costs and offer special tax incentives.
Setting aside monetary gifts from friends and family or unexpected income bonuses is also a good strategy when saving for a down payment. Since the money wasn’t included in your budget, your finances won’t be affected if you squirrel the funds away for your eventual down payment.
Crowdfunding is another method for accruing a down payment that is rising in popularity. There are a slew of dedicated websites for just such endeavors. Countless first-time home buyers have seen success with them.
We know the first-time home buying process can be confusing and a little scary. Saving for a down payment after previously renting sometimes seems like an impossible task. At Direct Home Lending, we will be there for you at every step of your journey to homeownership.
We are passionate about guiding our customers through the process of securing a mortgage efficiently and quickly. You don’t have to go through the down payment process alone. Call us at 800-575-3648 and speak with one of our specialists, or visit us online for a free quote.
We look forward to hearing from you soon!