Dear Egghead: I’m figuring out how much cash I might be able to scrape up for a down payment. How much should my down payment be?
Answer: The sweet spot for home buyers is a 20 percent down payment. Putting that much money up improves your odds of being approved by a mortgage lender — plus, the bigger your down payment, the lower interest rate you’re likely to get. And, since you’re financing only 80 percent of the purchase, your monthly payments will be lower.
Another plus of a healthy down payment: The home seller you’re negotiating with is more likely to accept your offer because they can see you’re serious.
Yet another perk of putting 20 percent down: you’ll avoid having to pay PMI (private mortgage insurance) which lowers the transaction risk, but saps your monthly cash flow because of the premiums. You need 20 percent equity in your home to avoid PMI.
Having said all this, some buyers simply can’t afford a 20 percent down payment — they don’t have that much cash lying around. And even if you do have the cash, you don’t want to deplete your emergency fund, which should be enough to support your lifestyle for at least six months, in case you become unemployed, disabled, or any other disasters. Likewise, you don’t want to crippled your retirement savings plan simply to get a house.
If you need to save up for a down payment, that’s delaying your entry into the housing market. So, in a rising market, you’ll be missing out on price appreciation while you’re on the sidelines saving for a down payment.
So far, we’ve been discussing “conventional” loans, which are the most common. But there’s an alternative, if you qualify: government-backed loans. If you’ve served in the armed forces, you’re likely eligible for a VA-guaranteed loan, which, if you qualify, requires no down payment. If this doesn’t spook your seller, then a no-down payment loan can make a lot of sense, especially if you don’t have much savings to contribute to a down payment.
The Federal Housing Administration also enables some home buyers to qualify with a lower down payment.
Even with a conventional loan, it’s possible to pay as little as 3 percent down, and sellers will accept that if the other elements of your offer are strong.
