A down payment is cash used to purchase a home. While it may not be enough to buy the home outright, it is a financial cash investment the property buyer makes into the home. Down payments are beneficial because they show lenders you are serious about owning the home and repaying the mortgage.

It's important to know that down payments don't have to be impossible to save up for, nor do they have to meet the conventional thinking of being 20% of the home sale price.

Understanding Down Payments

For many years, a common practice among home buyers was to place a 20% down payment on a home. For instance, buying a $350,000 home required a $70,000 down payment at the time of the sale. However, nowadays, buyers often put down significantly less.

The requisite down payment is determined by your mortgage lender and can be influenced by the type of loan you choose, as detailed below:

• Conventional Loans: Widely used, these loans offer a down payment range of 3% to 20%. Buyers should note that opting for a down payment below 20% necessitates the purchase of private mortgage insurance to safeguard the lender against default.
• FHA Loans: Typically require a down payment of 3.5% of the home's purchase price.

VA and USDA Loans: Generally do not mandate any down payment.

• Jumbo Loans: Applicable to substantial loan amounts for a given area, demand a 10 to 20% down payment, although this can vary between lenders.

Remember that down payment norms are not fixed and can differ according to the lender's terms and policies.

Setting a Down Payment Goal

In all situations, the less money you pay on a home through a loan, the better. That means you'll need to have a higher down payment. Here's why.

If you want to buy a $350,000 home and can afford a 20% down payment, you will avoid the requirement for private mortgage insurance, saving money in the process. Furthermore, lenders often offer lower interest rates when there is a larger down payment, reducing risk. By financing a reduced amount — $280,000 instead of the total price — you will have lower monthly payments and, as a result, pay less in interest over the life of the loan, resulting in substantial savings.

The key is to have a down payment that is as large as possible. At the same time, you don't want to wait too long to save for a down payment to buy a home. Instead, set a goal for yourself based on what is feasible in your situation.

• Determine which type of mortgage loan is best suited for you.
• Determine what the lender requires.
• Make a few decisions about how much you can put towards a monthly down payment.

Aim for at least 3%, typically the minimum most lenders will allow, but the closer you get to 20%, the better.

Ways to Save for a Down Payment

Many people do not know how they will put aside so much money to buy a home. Look at it in smaller chunks. Then, consider these strategies for putting more of your money away:

• Make sure you are saving before spending. Set up your paycheck deposit so that a portion of every paycheck automatically goes into your savings account. That way, you don't see or touch those funds.
• Be sure to use a safe method for investing that down payment, but choose a financial product to help you earn more. For example, determine if the interest rates on CDs or high-yield accounts in your area are better than just a basic savings account.
• Consider doing extra work or taking on a side hustle that allows you to save specifically for your down payment.
• Consider first-time home buyer assistance programs. Various areas of the country have down payment assistance programs, including your local housing authority.
• Work to cut back on your expenses in any way possible.

Common Mistakes to Avoid

• Don't assume that you can borrow your down payment. Borrowing your down payment, or even obtaining it as a gift from others, may not be good enough in the eyes of the lender.
• Don't make the mistake of assuming all you need is your down payment. You'll also need funds for closing costs, escrow, moving expenses, and an emergency fund.
• Don't overlook free grants and down payment assistance programs available in some communities.

Takeaways

The key to remember here is that a down payment is a good thing. It lowers the cost of buying a home and may help you to pay less each month on your mortgage payment. Look for ways to build up that down payment as much as possible.