Down Payments - What and Why

One of the main things potential homebuyers are always focused on is saving up for a down payment. Why is this important? What if you don't have 20% to put down on a home? What options do you have?

First, let's dispel the myth that you need 20% down to purchase a home. You do not!!

For a conventional (private) loan, you generally only have to put down 3%! That's a much easier to come by amount of money to save up over a period of time. And for an FHA loan (government-backed), the minimum is generally 3.5-10% depending on your credit score (higher the score, less you can put down).

If I only need to put down 3%, why would I put down more?

Excellent question. For a conventional loan, if you put down anything under 20%, you will have Private Mortgage Insurance (PMI) added onto your monthly bill for as long as it takes to pay your loan off up to that 20%. The reason you'll have this extra insurance is because the bank wants to ensure you're a safe bet and they're trying to protect their investment.

For an FHA loan, you will have PMI for the duration of the loan (unless you put down 10% or more - then the PMI lasts only 11 years).

Is it always good to put down more?

That's up to you depending on your financial scenario. More money up front means lower monthly payments and interest. Less money up front means you get to keep more money in your bank account and be able to use that for other purchases (groceries, gas, car insurance, child care, etc). While some people can comfortably put 20% down, it's also completely fine to put less money down so you don't have to scrimp on your current way of life.

What if I need some more financial assistance?

All states have a variety of down payment assistance programs. Connecticut has one through CHFA, found here: https://www.chfa.org/homebuyers-homeowners/homebuyers/downpayment-assistance-program-dap-loan/ It's basically a second loan specifically for the downpayment. Visit the website to look more closely at the requirements necessary. They can help with up to $20,000 in down payment assistance!

So what's the best course of action?

It's really up to you how much you feel comfortable with putting down and what works best for you and your financial situation. Do you want to avoid PMI or do you need more cash on hand? Is your credit score good or could it use some work? These are all factors to consider before choosing how much you're going to use for your downpayment.