Being a first time home buyer is quite exciting; however, the process can get overwhelming at times. One of the most important parts of purchasing a home is being able to provide a down payment on a mortgage to finance your first home. With many first time home buyers trying to figure out what exactly they need for a down payment and how much they should plan on spending, we have answered a few down payment frequently asked questions below!
What is a Down Payment?
A down payment is how much money you’ll need to pay upfront in order to purchase a home. Your down payment along with your mortgage (payment per month) will pay for the full cost of the home. Your down payment is one of the main things taken into consideration when lenders decide how much mortgage to approve you for. Lenders also take and strongly consider your credit score and history, overall debt, and your current annual income when evaluating you for a mortgage.
How Much Should I Save for My First Time Home Buyer down Payment?
In order to qualify for a loan, you will need to save 20% of the total sale price of the home in cash. A 20% down payment is required by most lenders to be approved for a mortgage. However, for the average person, a 20% down payment can be tough to come up with. This is where other down payment options specifically designed for first time home buyers come into play.
What Are the Most Commonly Used Down Payment Financing Options?
For the average American, saving 20% for a down payment is difficult. Luckily, there are other options available to be able to obtain a mortgage. Private Mortgage Insurance (PMI) allows you to provide a down payment of less than 20% and instead pay a monthly PMI premium in many situations until you’ve paid off 20% of your mortgage or until the loan to value ratio has reached 78/22. PMI is a great option for those who want to buy their first home but may not have the full 20% down payment to put down to start.
Government mortgage programs that are administered via banks are an option for some first time home buyers. Mechanics Cooperative Bank works specifically with Mass Housing to help fill the needs of some buyers. Visit masshousing.com for more details.
Additionally, if a family member is willing to help you with your down payment, you can prepare a gift letter for their financial assistance. While this may not be an option for all first time home buyers, it is a common practice. A gift letter is necessary to provide to your lender to prove that the money is a gift and is not an additional debt. The gift letter needs to include 5 important pieces of information and be formatted correctly; an example can be found here.
Planning your first time home buyer down payment can be overwhelming, but there are many options available to you so that you can be approved for a mortgage! For more information on down payments and first time home buyer education, download our eBook now!