First-time homebuyers often do not know how much they should contribute in upfront costs on their new house. They don’t want to overpay, as they want a cushion in savings, but they also want to put down enough money to qualify for their lender’s approval. If homeowners can afford to pay the ideal amount on their down payment, they should do so. However, if they do not have enough savings to do so, they can look into alternative options.
The optimal down payment
Typically, lenders prefer buyers to put at least 20 percent down on the house. If this is the minimum they will accept, the buyers might need to secure the mortgage by taking out a second loan. Before the 2008 recession, lenders did not always require buyers to put a minimum amount of cash down on the home. Some buyers could even take out mortgages that cost the full asking price of the home. However, the recession caused families to default on mortgages, especially ones with smaller down payments, leaving many of them facing foreclosure.
Options for smaller down payments
When homeowners want to buy a home but cannot afford the full 20 percent down payment, they have a few different courses of action:
- Get private mortgage insurance. When homebuyers put less than 20 percent down, their lender might require that the mortgage be insured in case the buyer has trouble making payments in the future. These premiums typically cost between 0.3 percent and 1.15 percent of the loan amount each year, according to SmartAsset.
- See if they qualify for FHA-approved loans. Zillow reported that the Federal Housing Administration backs loans for buyers with a decent FICO score and who are willing to put approximately 3.5 percent down.
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