You’re all set to become a homeowner and take a mortgage. You’ve examined your finances, checked your debt-to-income ratio, found a reasonably-priced property and got yourself a good lender. However, there’s only one thing that’s between you and the keys to your new house — the mortgage down payment.
Most mortgage lenders, especially those who offer conventional loans, require at least 20 percent down payment for you to get financing. Down payment is also important in securing a more attractive mortgage interest rate.
According to an HSBC report, 35 percent of American millennials now own their own home. 80 percent of those who are still non-homeowners are thinking of buying a house in the next five years
Even with this impressive statistics, a lot of young people still believe that a mortgage down payment is a huge hurdle.
One of the major causes of homeownership apprehension is the down payment.
But, why does this matter so much?
It matters to lenders
A substantial amount of down payments cushions lenders from possible risks. When a borrower shells out money for down payment, it prevents a mortgage lender from loaning out the whole value of the property. This reduces the amount of money at risk.
Another thing is that the bigger the down payment, the lesser chance for a borrower to default on the loan.
Moreover, this gives the lender some sort of assurance that you have the ability and willingness to pay the loan.
It matters to you
Although it isn’t easy to come up with a 20 percent down payment, the effort you put into saving for it will pay off in the end.
The moment you put a down payment, you immediately build home equity. This is the portion of the home value that you actually own.
For conventional loans, paying a 20 percent down payment will get rid of the need for a private mortgage insurance (PMI). A PMI kicks in when you put a down payment lesser than 20 percent of the home value. This insurance protects your lender in case you default on the loan.
How Can You Come Up With a 20 Percent Down Payment?
First on the list is the good old save up for it trick. This is recommended by many mortgage experts. Some would say that if you can’t afford a down payment just yet, it might not be the right time for you to get a mortgage.
Saving for the 20 percent down payment may take several months or years. If you have the patience to wait that long, go for it.
But if you want to speed things up a little bit, you can supplement what you have in your bank with down payment assistance programs. Zero-interest assistance loans, non-repayable grants and mortgage credit certificates are available if you need help with the down payment.
In general, these programs are designed for low- to moderate-income individuals. Some are exclusive for first-time homebuyers. The goal is to provide assistance to deserving people who just can’t afford the down payment.