So many of us count ourselves out of the race of home buying before we even really try because of fears of not having enough saved. The concept of needing 20% down in order to buy a home is probably the most commonly shared and most believed myth when it comes to home buying. Do you want to know the truth about how much you should have saved in order to purchase a home? Let's get into it.
CONVENTIONAL: 3%
Conventional loans typically require a 620+ credit score in order to qualify and require a minimum 3% down payment for first time home buyers. Conventional loans do have private mortgage insurance, otherwise known as PMI, on loans with under 20% equity. When you do reach 20%, you can either refinance or call your loan servicer to request what's known as a "recast" to drop that PMI.
FHA: 3.5%
FHA loans are a great option for buyers with a 580+ credit score. While conventional loans focus more on the quality of the buyer, FHA loans focus more on the quality of the property, so the appraisal might be a little tougher than that of a conventional loan but it is a great way to get your foot in the door of homeownership. FHA loans are a government backed product, so they do not technically have PMI but they do have what is known as Up Front Mortgage Insurance Premium, or MIP, which is more or less their version of PMI. Unlike PMI on conventional loans, MIP will not drop off at a certain equity percentage and will be there for the life of the loan.
USDA/VA: 0%
USDA and VA loans are great programs for those who qualify based on military service, income or area limits. While VA loans do not have a minimum required credit score by the VA, there will typically be a lender overlay and minimum score requirement of 580+, USDA loans require a 640+. Since both are government backed loans, they also do not have PMI nor do they have MIP.
CLOSING COSTS: 1-2%
Closing costs can be sneaky if you're not prepared, but you do want to make sure you have money saved outside of the minimum down payment requirements to cover title, escrow & miscellaneous expenses like inspections and appraisals etc. On average these will run about 1-2% of your total purchase price.
Now that we know the basics, let's go over some examples of minimum down payments based on common purchase prices for our market.
EXAMPLES:
EX1. $425,000 Purchase Price
Conventional: $12,750
FHA: $14,875
USDA/VA: $0
Closing Costs: $8,500
Total: $21,250-$23,375
EX2. $450,000 Purchase Price
Conventional: $13,500
FHA: $15,750
USDA/VA: $0
Closing Costs: $9,000
Total: $22,500-$24,750
EX3. $500,000 Purchase Price
Conventional: $15,000
FHA: $17,500
USDA/VA: $0
Closing Costs: $10,000
Total: $25,000-$27,500
Your savings goal will vary based on your credit situation, but these are a good list of numbers to keep on hand when outlining your budget. I'd like to note that there is multiple down payment assistance options to help offset your down payment costs or your closing costs in our area - if you're looking for more info on that or the rest of my home buyer resources, click here.
I'm more than happy to connect and answer any questions - click the "let's connect" button on the top of the page to get in touch!