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How Much Do I Need for A Down Payment?

When you decide to purchase a home, you might find one of the most common roadblocks for hopeful buyers is coming up with enough money for a down payment.

This is a percentage of the purchase price that you pay upfront, usually in cash, to secure a mortgage loan. The amount of money you need for a down payment can vary depending on a number of factors, including the type of loan you choose, the price of the house, and your credit score.

In the past, at least a 20% down payment was considered standard practice for getting a mortgage loan. A larger upfront payment reduces the risk for your lender, lowers your monthly payments, and in some cases can affect your interest rate.

Thankfully, the situation has changed, and there are a variety of assistance programs that help make owning a home much more accessible. Here’s everything you need to know about this critical part of the mortgage loan process.

Going the Conventional Route

There are several types of mortgage products, and an experienced lender can help you determine which ones you may be able to qualify for.

The most common type of home loan is a conventional mortgage, which typically requires a down payment of at least 5% of the purchase price, or as little as 3% for a first-time homebuyer. However, if you have a lower credit score, you may be required to put down a larger percentage. For example, if you have a credit score of less than 620, you might have to lay out as much as 10% for a conventional loan.

Your mortgage lender will also calculate your DTI (debt-to-income ratio). This is your monthly debt burden versus your monthly income. Having a lower DTI is great — having one greater than 50% may be prohibitive, and one above 43% is a sign that the lender needs to take a deep dive to ensure your ability to repay is healthy. 

With a conventional loan, you’ll also probably need to buy private mortgage insurance (PMI) if you have less than 20% down. This policy protects the lender if you default. The cost varies but Freddie Mac estimates it costs between $30 and $150 per month for every $100,000 borrowed, depending on your risk profile. PMI is not a bad thing, in fact, it can be a tremendous tool for leveraging a lower down payment to get into a home, or to keep some additional money in your bank account for other pursuits. 

Exploring Government-Backed Loans

There are 3 different kinds of mortgages backed by the federal government. These are guaranteed by the agency that offers them and have lower qualification and down payment requirements than conventional loans:

If you have a credit score of 580 or higher, you can get an FHA loan with a 3.5% down payment; for those with scores above 500, a 10% down payment is required to qualify for these kinds of mortgages.

The FHA offers several popular programs for prospective homeowners, such as ones specifically for condominiums or manufactured homes, rehabilitation and renovation loans, and mortgages for one to four-unit structures for those who want to try the landlord lifestyle or have a large extended family.

The VA helps servicemembers, veterans, and eligible surviving spouses achieve their dream of homeownership. This agency doesn’t require a down payment at all, they feature low interest rates and closing costs, and there’s no need for mortgage insurance (the VA covers the risk). However, there is a one-time funding fee, typically between 1.25% and 3.3% of the loan amount, that can be financed as part of the loan.

The USDA’s Single Family Housing Guaranteed Loan Program provides low- and moderate-income buyers with the opportunity to purchase, build, rehabilitate, or improve a home in an eligible rural area. 

In Illinois, the majority of the USDA-qualified rural areas are located in the southern part of the state, near Carbondale and the Shawnee National Forest. This loan product is a great choice for remote workers, potential farm owners, or those who just prefer peace and quiet and the gorgeous natural beauty of the country. Chicagoland’s closest qualified rural areas are just south of Joliet, on the shores of Goose Lake, or adjacent to the Midewin National Tallgrass Prarie.

How Much House

One main element that determines how big of a down payment you’ll need is the cost of the home you’re trying to purchase. 

Generally, the more expensive the house is, the more money you will need to put down. For example, if you are buying a $200K house and you are putting down 3%, you will need $6,000. If you are buying a $300K residence and put down the same percentage, you will need $9,000. 

Another aspect to consider is the closing costs associated with buying a home. These costs include things like appraisal fees, title insurance, and attorney’s fees, which can add up quickly and eat into savings. In this area, closing costs can range from 2% to 5% of the sale price

Keep in mind, that if you qualify, the lion’s share of your down payment could be covered with one of our many great down-payment assistance programs.

Don’t Go It Alone

When calculating how much money you need for a down payment, it’s important to consider your long-term financial goals and make sure that you can truly afford to purchase something right now without placing yourself in an unsustainable situation.

Teaming up with an experienced and knowledgeable mortgage loan and real estate expert can make this process go much more smoothly. Chicago’s housing market evolves daily, and it’s actually an ideal time for first-time buyers to make their move.

The mortgage loan process is complex and can be overwhelming to just about anyone, but I’m here to help you navigate through and find your way to closing on a new home. Don’t hesitate to reach out and learn more!

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