How Much Should You Save for Your Down Payment on a Property?

If you’ve ever looked into your options for what to do with the extra money in your bank account, one option has probably crossed your mind: What if I buy a house? After all, when you consider the benefits of homeownership – like building equity over time and having something that’s truly yours – buying a home can seem appealing.

However, before you go house shopping, it’s important to consider whether you’re financially ready. Here’s how much you should save for your down payment on a property.

The Dreaded 20%

It’s a given. You’ve heard and seen the phrase “20% down payment” more times than you’d like since you started asking about mortgages. 20% used to be a small insignificant percentage, but now it’s the dreaded figure, isn’t it?

Thankfully, it’s merely a guideline and you have options. But first, if you can swing it, a 20% down payment has benefits you should know about. Here are the major perks:

• No PMI- private mortgage insurance (PMI) protects the lender if you default on your loan. With a 20% down payment, you won’t have to buy private mortgage insurance
• Lower interest rates- a loan-to-value ratio is the percentage of the purchase price that the lender is willing to finance. If the LTV ratio exceeds 80% because you’ve put down less than 20% you’re a higher risk. Lenders will balance this out by saddling you with higher interest rates
• A competitive edge- when sellers have multiple offers, a sizable down payment can be how you beat out the competition. It indicates to the seller that you can get final loan approval and afford the closing costs

Your Options

Now, if you can’t cough up a 20% deposit, you’re in good company. The National Association of Realtors puts the down payment percentage for first-time homebuyers at 6% to 7% since 2018. These percentages can get even lower if you know where to apply to.

In this brutal economy, here are three of your options:

Conventional loans

Conventional loans are not subsidized by the government. The loan requirements are entirely up to the individual lender. Still, you can get a conventional mortgage home loan with a down payment as low as 3%. If you have a solid credit score, you can apply for this type of loan online and get it in no time.

Government-Insured Loan

If you meet FHA property standards and your credit score is 580 or higher you qualify to put down the minimum down payment for an FHA loan, 3.5%. If your score is lower, you still only need a 10% down payment.

USDA Loan

The down payment if you qualify for a U.S Department of Agriculture loan is 0%. The eligibility criteria include property that’s in an approved rural area and being in a certain income bracket.

Damage Control

You may be able to have your cake and eat it too. A low down payment for buying a property doesn’t have to hurt you financially in the long run.

For example, you don’t have to pay PMI forever. Lenders are obligated to cancel PMI when your loan balance gets to 78% LTV of the value of the house under the Homeowners Protection Act.

Also, you may be able to get a reasonable interest rate if you prove to lenders that you’re a good risk with a solid credit score and a steady income.

Savings Tips

Now that you know how much to save up, you can get started. Since saving is not the easiest thing, here are some tips:

• Set a savings goal
• Use a budget calculator
• Set up automatic payments to a savings account
• Start a side job
• Consider a spending freeze
• Ask loaded family members for a cash gift. Politely

A substantial down payment is advantageous, but no percentage is set in stone. Some lenders let you pay as low as 3%, so don’t transfer your Netflix subscription money to your savings account just yet. Simply factor in your eligibility and pick a suitable loan option.

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