Buying a home is a lifetime goal for many and is one of the largest purchases likely made so it's important to take the right decisions especially in determining your down payment. How much you need for a down payment depends on the type of loan and how much the house costs; therefore, home-buyers choose to wait and save money to use as a down payment before purchasing property. However, the recommended down payment rate of 20% doesn’t have to be the standard amount for everyone.
How does a down payment work on a home loan?
It’s possible to obtain a mortgage without a down payment or with a low down payment using special lending programs, but keep in mind that most lenders require you to make a down payment. The reason for requiring a down payment on a home is because down payments reduce the risk to the lender. Homeowners with their own money invested are less likely to default on their mortgages. Also, if the lender has to foreclose and sell the property, it’s not on the hook for the entire purchase price, which can limit its potential losses if the home is sold for less than the remaining mortgage balance.
Most lenders prefer a down payment of 20% or higher to qualify for a conventional loan, but if you don’t have 20% there are still loan options you might consider where you can put down less. According to a study from The Urban Institute (https://www.urban.org), more than two-thirds of renters say the down payment is their biggest barrier to homeownership. While a 20% down-payment is the general approach, it is possible to purchase a home with less.
Pros of a 20% Down Payment:
- You’ll get a lower mortgage rate: Mortgages are priced on risk and the less money down from you means more risk for the bank. If you put 20% down, the bank is protected against home values dropping and you get a better deal.
- Fewer fees—If you put less than 20% down, in order to buffer against risk, a bank will require you to pay for private mortgage insurance (PMI). This is calculated on your remaining loan balance.
The Police Credit Union’s offers a low down payment option, including a fixed-rate loan with a 3% down-payment, making home ownership more affordable for qualified buyers.
The Police Credit Union offers a complete mortgage lending solution. Visit the Mortgage Center https://www.thepolicecu.org/accounts-services/home-loans for support through your home buying process, search loan options, check rates and apply today!