Down Payments: What to Know
Published: Thursday, September 05 2013
Here at RP Funding we want to educate consumers in such a way that before they start looking to buy or refinance a home they have a plethora of tools and knowledge available to them. To start, when looking to buy a home, especially for a first time home buyer, a major piece to consider is your down payment. Determining how much you can afford to put down on a home is a good starting point and will play a major role in what kind of financing you will need in order to move forward.
Your down payment has a large impact on your monthly payment. The more money you are able to put down the less you will have to borrow, thereby keeping your monthly payments lower. With most loans if your down payment is less than 20% you will be required to pay monthly mortgage insurance. Mortgage insurance simply allows you to borrow more than 80% of home value while also protecting the lender in the event that you default on your loan. Most lenders look to get a 20% down payment so that in the event of a foreclosure that 20% that you put down helps keep the lender from losing money. There are many different types of loans, some of which allow you to put less than 20% down and do not carry mortgage insurance. First is a VA Loan. VA Loans are special loans that are guaranteed by the Veterans Administration and are reserved only for those who have served in our countries military. It allows the borrower to purchase a home with no money down and also does not carry monthly mortgage insurance. However, there is an "up front" mortgage insurance otherwise known as a Guarantee Fee. Another type of loan is a USDA Loan. USDA financing, like the VA Loan, is 100% although it does carry a high "up front" mortgage insurance as well as high monthly mortgage insurance. USDA loans can take a long time to close and there are income limits depending on the county. Additionally, with a USDA loan the home has to be in a designated rural area. You can visit the USDA's website to view maps showing which areas qualify. FHA Loans are also an option when looking to buy a home. These loans have no income limits or location requirements but do require at least a 3.5% down payment. FHA Loans also carry a high "up front" as well as high monthly mortgage insurance. Finally there are conventional loans with private mortgage insurance. These loans typically require 5% down but with lower monthly mortgage insurance than an FHA Loan. So, although it requires a higher down payment the monthly payments should be lower. Using this information, you should be able to better identify the loan that is right for you using a down payment you can afford.
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