Down payment: What do you really need?
Most first time buyers think they need to save up 20% or more of the purchase price of a home. While this certainly can be done, most loan types today only require 3-5% of the purchase price as a downpayment. If you’re a veteran using a VA loan, or buying in a rural area and using a USDA loan, you don’t have to provide anything as a down payment.
There are benefits to having a higher down payment that are worth noting:
- If you are able to put down 20% or more, you avoid paying Private Mortgage Insurance (PMI), which your lender will require. The cost of PMI varies based on the price of your home, and is included in your monthly mortgage payment until you reach 18-20% equity.
- Note that FHA loans always require PMI
- The higher your down payment, the lower your loan amount and thus your monthly mortgage payments
There are likewise benefits to putting less money down:
- You can buy a home sooner rather than later; for some, especially in Washington, saving up a $120k+ down payment for their first home may take several years, and buyers may not want to wait that long.
- Less money spent on a down payment can mean more money left in savings for closing costs, furnishing a new home, renovations, or just to simply have a cushion.
So, which option is better?
It truly depends on your situation as a buyer. If you have a large amount of money saved already or have a timeline to save you’re happy with, it may make sense to put 20% or more down. On the other hand, if you’re ready to get into a house and don’t have a large savings, you can absolutely move forward with a home purchase. The bottom line really does depend on what you want or are able to spend per month on a mortgage payment.
How long do I need to work at my job?
For lenders to approve a home loan, they will obviously need to know you can pay them back through your monthly mortgage payments. Your income determines how much you can take on as a loan, but lenders will also want to see a solid employment history so they know you’re reliable.
Currently, the standard guideline is at least two years of employment history. A gap in employment 6 months or less may not impact your chances of getting approved if you had to care for a family member, had a new baby, were laid off or pursued higher education. Two years of history doesn’t necessarily mean two years in the same job. If you got promotions or took new jobs that paid higher, this probably won’t stick out as anything of concern.
If you graduated college recently and don’t have 2 years in the workforce yet, you can submit college transcripts instead.
If you’ve been working in the same field for less than two years, it may be more difficult to secure a loan, but certainly not impossible; lenders look at the whole picture, including your credit score, debt to income ratio and down payment/savings amount. We already discussed down payment, but let’s take a closer look at these other factors.
Credit score
Your credit score essentially assigns you a rating based on how well you pay back debt on things like credit cards and loans. If you open and close new credit cards often, and miss several payments on a loan, your credit score will be lower. If you pay back your debt consistently and on time, your credit score will be higher. A high credit score shows a lender you have a history of handling debt well, and that you can be trusted with a mortgage.
Scores can range from 300-850. To qualify for a loan, your score will need to be around 600 or higher. From there, the higher your score at certain intervals, you’ll be able to get a lower interest rate.
Extra savings for closing costs and reserve
In addition to your down payment, you’ll also want to save for closing costs, and most lenders require a reserve savings that will cover the first few months of mortgage payments. Closing costs tend to be 2-5% of the purchase price of the home for buyers.
