How much of a down payment should I make? Where can my loan funds come from? These are just a couple of the most common questions that we hear from potential home buyers as we begin to assist them with navigating through the buying process. Here are a few answers to these questions so that you may make the most informed decision possible regarding your down payment.
Should I put more than the minimum down on an FHA purchase?
FHA mortgage loans allow for borrowers with less than perfect credit to purchase a home with a down payment of only 3.5% of the purchase price. As a result of credit guidelines that are not quite as strict as those found on conventional financing, FHA requires both up-front and monthly mortgage insurance on all FHA loans. While it is possible to reduce the dollar amount of the monthly mortgage insurance component by putting down 5% or more on a home purchase, the reduction in the monthly mortgage insurance amount is minimal compared to the out of pocket expense of the larger down payment.
For example, on a $200,000 home purchase with the minimum 3.5% down payment ($7,000), the monthly mortgage insurance is calculated by multiplying the loan amount by the monthly mortgage insurance factor (1.35%), and then dividing by 12 (193,000 x .0135 / 12 = $217.25 monthly mortgage insurance amount). By applying a 5% down payment ($10,000) you can lower the monthly mortgage insurance factor from 1.35% to 1.30%. Using the same calculation (190,000 x .0130 / 12 = $205.83) you can see that by applying an additional $3,000 toward your down payment, the resulting savings on the monthly mortgage insurance payment equates to about $12/month. At that rate of savings, it will take approximately 20 years to recoup the additional $3,000 that was applied to the down payment.
Since most buyers utilizing an FHA mortgage have intentions of refinancing into a conventional mortgage loan at some point in the future, it is generally not recommended to apply more than the minimum down payment on an FHA purchase.
Should I put more than the minimum down on a conventional purchase?
Conventional mortgage loans require a minimum down payment of 5% of the purchase price but also require mortgage insurance if the down payment is less than 20% of the purchase price. Unlike FHA financing however, mortgage insurance rates for conventional financing are not calculated using a flat percentage of the loan amount but rather are underwritten much in the same way that the mortgage loan itself is. This means that your credit history, source of down payment, and down payment amount are all taken into consideration when determining the amount of the required monthly mortgage insurance amount. As a result putting down more than the minimum, even if it is less than the 20% required to eliminate monthly mortgage insurance entirely, can save you a significant amount of money on monthly mortgage insurance premiums.
What are the allowable sources of down payment funds?
• Gift funds (entire down payment can be from gift funds on both FHA and conventional financing with appropriate documentation)
• Loan or withdrawal from 401k or IRA with no impact to debt-to-income ratio
• Sale of stocks or bonds
Do I have to have the entire down payment saved before buying a home?
Depending on the amount that you already have saved you may be able to save the remainder over time as long as you have a savings plan in place which can be verified by the lender, and that you will have the minimum down payment saved by the time that your purchase closes. This can be an advantage of buying a brand new home with a 3-6 month build time as opposed to a resale which typically closes within 30-45 days from the date of the purchase contract.
With all these factors in mind, it’s important to consult with your lender to decide what will be best for your situation. Beazer Homes offers Mortgage Choices so that you have the ability to shop around, compare lenders, and find the best deal for your new home.
*Content provided by Marquee Mortgage, a Beazer Homes preferred lender in the state of Arizona.