Your down payment is an integral part of purchasing a home. Lenders require that you put some of your own money (equity) into the purchase. They use a formula called the Loan to Value Ratio (LTV) to help determine their risk level. For example, if you buy a $250,000 home and put down $25,000, then the LTV is 90%, and your equity portion is 10%, or a 10% down mortgage.
Here are a few examples to help you understand how this works for a low down payment mortgage. The numbers don't take into consideration other lending considerations such as debt to income ratio, credit score, etc.
If you Have a Down Payment Available of $10,000, then you can purchase a home, with these down payment values:
3% Down (97% LTV): $333,333
5% Down (95% LTV): $200,000
10% Down (90% LTV): $100,000
20% Down (80% LTV): $50,000
If you are considering purchasing a house, you might want to set a budget and start saving for a specific down payment. For example, if you're going to purchase a home for $350,000 and are looking for a low down payment of 5%, then you need to save $17,500.
2 Comments
I have about 5% saved to buy a home. My credit score is about 610, but is increasing because some of my bad items are getting old. I make my payments on time and I am paying off my credit card. My friends tell me to wait and save up more money. Also, they say that an FHA loan has lots of mortgage insurance costs. I don't know what to do. My oldest kid is going to start school next year and I really want a home of my own. What should I do?
Hello Edith. That is fantastic that you are saving up money for a home AND also improving your credit score. It is always a tough decision between renting and buying a home. Are housing prices in your area going up? Is it a buyer's market or a seller's market? In the bottom line, buying a home is a long-term investment, and you never really know if it was the best time to buy. The bottom line is, can you afford to buy a home.
As you could tell from the article, there are a lot of mortgage options available with a 5% down payment. However, with a 610 credit score, your options are limited. Even if you raise your score to 620, and qualify for a Fannie Mae or Freddie Mac low down payment mortgage, it is quite possible that you won't find a lender who qualifies you. (Did you check your debt-to-income ratio? Try the Bills.com DTI Calculator).
While the FHA has higher upfront costs and the mortgage insurance is not canceled (unless you sell the house or refinance the mortgage), the nominal interest rate is often lower.
My recommendation is that you start shopping for a mortgage and get pre-qualified. That way you can start looking for a home. When you are ready to close on a home, then you can see if our credit score improves and you can qualify for a mortgage with better terms. (Remember, mortgage rates are constantly changing).