Home Buying: How to Manage the Down Payment

The largest expense that most home buyers will encounter is the down payment. There are reasons to consider paying more, just as there are advantages to putting down as little as possible. These tips help buyers decide how much to put down towards their home mortgage and how they can get the money for it.

How Much Should I Put Down?

Buyers, especially first-time home buyers, can get overwhelmed by the thought of a down payment. After all, if the median home price nationwide is hovering around $300,000, a down payment of 20 percent is a notable $60,000. Although 20 percent is widely touted as an industry standard, there are plenty of options for prospective home buyers who cannot put that much down. The 20 percent down payment, in a lot of cases, assumes that a buyer already has accrued equity in an existing home that they can use toward the down payment.

Before making a decision about the size of the down payment, future home buyers should estimate how much they can realistically put down, and the opportunity cost of shifting funds from elsewhere. Making a larger down payment is beneficial in that it gives the buyer a larger stake in the home's equity at the beginning and lowers the monthly payment. However, it also ties up funds in the home that would be harder to access to invest in other opportunities. Buyers who have the ability to make a larger down payment, but could reasonably earn a higher rate investing that money elsewhere, may find that it is more practical to make a smaller down payment, whether buying a home in Murrel's Inlet or elsewhere.

What Are the Low Down Payment Options?

Many mortgage programs allow applicants to make a much smaller down payment, and in some cases no down payment at all. Loans guaranteed by the Federal Housing Administration (FHA) may permit a down payment as low as 3.5 percent. Freddie Mac and Fannie Mae, government-run organizations that buy loans from approved lenders, offer mortgages with a 3 percent down payment. All of these programs set specific limits concerning a borrower's:

• Minimum credit score
• Maximum debt-to-income ratio
• Minimum assets in reserve

Certain United States government departments, such as the Department of Veterans Affairs (VA) and the Department of Agriculture (USDA), allow applicants to make no down payment at all. To qualify for these loans, borrowers must be current service-members or veterans, or purchase land in specified rural areas.

Where Can Down Payment Funds Come From?

The main point of making a down payment is for the borrower to have at least a small stake in the ownership of the home. However, many lenders are quite flexible in the source of these funds. For example, potential home buyers may be able to use a monetary gift from a relative toward a down payment, as long as they can verify in writing that the money is a gift with no expectations of repayment. People who meet certain criteria for income and location may be able to take advantage of down payment assistance programs. First-time home buyers can even withdraw from an independent retirement account (IRA) without the standard early-withdrawal penalty, although they may be taxed on the money they take out.

Buying a home costs money, and the down payment is usually the biggest bite. Although 20 percent is commonly mentioned for a standard down payment, it is usually not required. With this information, buyers can make an educated decision about their down payment options, and the choice that is right for them.