How large should your down payment be? This can be a confusing subject for many potential home buyers because there is no one-size-fits-all answer. While some borrowers seek to put up as small a down payment as possible, others try to make their down payment as high as it can be.
The best approach, however, is to rightsize your down payment instead. How can you do so? Here are a few things to consider as you raise or lower your down payment to find the perfect number.
Raise the Down Payment to Gain Options
While it’s possible to buy a home with as little as 3% or even 0% down, this will limit your options. Loans that offer such generous borrowing terms provide standard and conventional terms, but they may not serve you well if you want a more expensive property or you want to customize your terms. The more you can change your down payment plans, the more options you open up.
Lower the Down Payment to Keep Liquidity
Many borrowers work hard to save up their down payment, but they may stretch their finances a bit too far to put a large amount down.
While you may want to put the traditional 20% down on a house, how much will be left for emergencies, upkeep, and irregular expenses? Putting all your available cash into your home ties it up, preventing it from being accessible for other needs. Reducing your down payment by a little and keeping more liquid cash can be an important safety net, particularly for first-time buyers without experience in ownership.
Raise the Down Payment to Change LTV
What is your home’s loan-to-value ratio (LTV)? This number is the amount the home is worth compared to how much you want to borrow for it. For instance, if the property is appraised at $300,000 and you want to put down 3%, your LTV ratio is 97%. Any LTV higher than 80% usually requires that you pay mortgage insurance and will cause higher interest rates for the loan.
If you put down a higher amount and therefore reduce your LTV below that key threshold, you can get a much better deal and see significant savings.
Lower the Down Payment With Great Credit
Check your credit score before you decide on your target down payment amount. A great credit score — 740 or above — opens you up to lower interest rates and a wider variety of loan types. If you can get those options without including a higher down payment, you may not need to put up the extra money. However, if your credit score is merely good — starting around 620 — more money may compensate for it.
Raise the Down Payment for Flexibility
Perhaps cash in savings isn’t your problem, but you have somewhat fluctuating income. This is common for small business owners, investors, independent contractors, those working on commission, and two-income households who do seasonal work. If you may earn less income some months, it’s a good idea to have a lower minimum required mortgage payment and make extra payments when times are good.
To ensure you can always keep up with payments, consider lowering your mandatory minimum to a comfortable level during low earning months. You can generally do this in two ways: either by buying a less expensive property or reducing the amount you need to borrow.
Where to Start
The best way to find the perfect size for your down payment is to learn more about how it will affect your choices. Begin by meeting with the mortgage financing team at Dominion Capital Mortgage Inc. We will help you analyze your resources, your property goals, and the available loans you can choose from. Call today to get started.