One of the biggest questions you want to be answered when considering buying a home is how much money you'll need to put down. By putting a larger down payment, it can reduce your monthly mortgage payment and protect you from any additional costs, but what happens if you just don't have the money?
Downpayments and earnest money deposit do work in tandem. In earnest money, the deposit is the initial money that holds the property for you. It shows sellers you are serious and willing to put some money on the line. The seller, in turn, cannot continue to list the property unless the property offer is contingent on the sale of another property, in which case, any details should be clearly identified in the contract. This earnest money deposit will only get deposited once there is mutual acceptance on the offer and it will go towards the down payment or be a credit to the buyer.
The down payment is the amount of money you are putting down on the property at closing to take off from the initial loan payment. The lower the down payment, you will probably have a higher mortgage payment, depending on terms and interest rates.
So how much do you really need to put down?
There are FHA and government-backed loans that require a downpayment of little as 3.5% and VA and USDA loans often have zero down payment, where the buyer just needs to make closing costs. But, there are benefits of a higher down payment. A 20% down payment means that you are a pretty good risk to lenders and they feel they will have no trouble recouping the additional 80% if you default on the loan.
However, if you can't put that much money down, the lender will usually require you to buy private mortgage insurance. This mortgage insurance is tacked onto your monthly payment and stays on there until the loan to value ratio goes to at least 80% or lower.
Making a higher down payment isn't necessarily the best idea. This means that a big chunk of money will be tied up in the home and you can't just access that money if you're slapped with an emergency home repair. If you foreclose on the property, the down payment will never be returned and if you have to sell the home for less than you paid, you will lose that down payment or equity forever.
Typically, a 3% to 10% down payment is common. This will put enough skin in the game to give you some equity, potentially lower your chances of having private mortgage insurance, and yet leave you a little bit in reserves for home repairs or any emergencies.
But remember, 10% on a $400,000 home is still $40,000. It still can be difficult to come up with that large chunk of money but there are other alternatives.
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