If you are thinking of buying a house in the United States this year, you may be wondering how much money you need to put down. Many people may think that it is 20% of loan to secure a mortgage in the United States, usually foreigners need to make a down payment of more than 30%, although it is possible to get lines of credit for foreigners with 25% of down payment.
While there are several lower down payment options available for qualified buyers who don't want to pay 20%, it is important to understand how a larger down payment can have great benefits as well.
The truth is that there are many available programs that allow you to reduce the down payment by up to 3.5% if you are a tax resident of the United States, which can be a great benefit to those who wish to purchase a home sooner rather than later. Those who have served the United States as military, law enforcement, or firefighters may also qualify for a Special Loan (Veterans Affairs - VA) and may not need a down payment. These programs have actually reduced the time in savings for many potential buyers, allowing them to start accumulating household wealth sooner.
Here are four reasons why putting in at least 20% as a starter is a good plan, if you can afford it.
1. Your interest rate may be lower.
An initial payment of at least 20% versus an initial payment of 3-5% shows your lender that you are more financially stable and does not represent a large credit risk. The more confident the lender is in your credit score and your ability to repay the loan, the lower the mortgage interest rate he is likely to be willing to offer you.
2. You will end up paying less for your house.
The larger the down payment, the smaller the loan amount for the mortgage. If you can pay 20% or more of the cost of your new home at the beginning of the transaction, you will only pay interest on the remaining 80%. If you put down 5%, the additional 15% will be added to your loan and will accrue interest over time. This will end up costing you more over the life of your loan.
3. Your offer will stand out in a competitive market.
In a market where many buyers are competing for the same house, sellers like offers to come in with down payment of 20% or more. The seller gains the same trust as the lender in this scenario. You are seen as a stronger buyer with a mortgage that is more likely to be approved. Therefore, the deal is more likely to go through.
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4. You will not have to pay Private Mortgage Insurance (PMI)
What is PMI? According to Freddie Mac:
"PMI is an insurance policy that protects the lender if you are unable to pay your mortgage. It is a monthly charge, included in your mortgage payment, required for all conforming conventional loans with down payments of less than 20%. After you have amortized at least 20% on your home, you can cancel your PMI and remove this expense from your mortgage payment."
As mentioned earlier, when you pay less than 20% when buying a house, your lender will see that your loan has more risk. PMI helps them recoup the investment made in you if you are unable to repay the loan. This insurance is not necessary if you can pay 20% or more.
Often, home sellers who want to move to a larger or more expensive home can use the equity they have earned from the sale of their home to invest 20% in their next home. With the equity that homeowners have today, it is a great opportunity to apply those savings into a down payment of 20% or more on a new home.
If you are looking to buy your first home, consider the benefits of a 20% down payment over a smaller down payment option.
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If you are thinking about buying a house and are already saving for a down payment, let's have a chat to see which financing line best fits your long-term plans.
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