As a home is likely the largest investment you will ever make, it’s important to know as much as you can about the process and the money you’ll need before you get started.
There are many different areas where your money will need to go when you’re buying a home in Texas. Some of the biggest areas will be your mortgage loan, your closing costs, and your down payment
What is a Down Payment?
A down payment is a money a buyer pays out of pocket to the seller. This upfront cash is considered part of the total amount you will pay for the home.
So if you are buying a home for $250,000, and you have a down payment of $50,000, you will need to get a home loan of $200,000 to cover the rest of the cost of the home.
The down payment amount is the very beginning of the equity you may have in your home.
The Importance of a Down Payment
When you’re buying a home, some sort of down payment will be required.
A down payment helps a lender trust that you are in a financial position to make this purchase, and that you have a financial interest to care for the property.
Generally speaking, lenders like to see a down payment of 20%.
The Benefits of a 20% Down Payment
For one thing, your lender knows you’re serious.
That means you can shop around for lenders and find the best deal, and even negotiate the interest rates they offer you to get the best rate possible.
Lenders will want your business as you will appear as less of a risk for them to get their investment back. You will also have the benefit of having more equity in your home.
If you pay less than 20% of the total value of the home as a down payment, then you will need to buy private mortgage insurance (PMI). This will be an ongoing cost for you to consider. One of the benefits of a down payment of 20% or more is avoiding this cost altogether.
You will likely get a lower interest rate if you have a higher down payment. When determining your interest rate, lenders will look at the amount of your down payment (which is often considered the loan to value ratio, or LTV), your credit history, and your debt to income (DTI) ratio.
These factors will be the primary ways the lender decides what to offer you for an interest rate. While you can work on improving your credit and lowering the amount of debt you have before you go to apply, the other big thing you can to improve your interest rate is to have a larger down payment.
When you have a lower interest rate on your mortgage, overall, you will end up paying less for your home. You will also be borrowing less, which means less total money to be paying an interest rate on, so this is another way you will end up paying less overall for your home.
Where Can I Get The Money for a Down Payment?
To get the money you’ll need to work on saving. If this isn’t your first home, many people get the money from selling their current property. It is also common for first-time home buyers to get the money as a gift from family, or as a grant from a nonprofit.
Still, the most common source of money for a down payment, especially for first-time home buyers, is to save. It’s a common strategy to create a savings account specifically for this goal so you can mark your progress.
Buying a House Without 20%
You can pursue buying a house in Texas without the 20% down payment. While there are many benefits to having that amount, there are often ways around it.
For example, you can get an FHA loan with a 3.5% down payment if your credit score is over 580. You can also get an FHA loan with a credit score as low as 500 if you have a 10% down payment. This is a U.S. Federal Housing Administration loan and comes with a 30-year fixed-rate home mortgage. These loans are capped at a limit of $417,000. Be aware that FHA loans also require you to buy mortgage insurance, which will be a recurring payment.
Many of those looking at buying a home in Texas qualify for VA loans. These are through the U.S. Department of Veterans Affairs and are for current members of the military, veterans, and surviving spouses. You will need to pay a VA funding fee, which is relatively small, but you don’t need a down payment, there is no minimum credit score, and you won’t need to pay for mortgage insurance.
Freddie Mac and Fannie Mae loan requirements, you can get a mortgage with as low as 3% down payment. You will end up paying more in the long term in interest on your loan and you will need to buy private mortgage insurance. You will also need to have a strong credit score and a low debt to income ratio to get the best deal possible on a conventional home loan without the benefits of a 20% down payment.
Plan Ahead For The Upfront Costs of Owning a Home
Your down payment has a large impact on the total amount you will pay for your home over the course of your mortgage. It also heavily impacts the process for applying for a mortgage. The better your down payment, the more serious you look as a buyer.
Once you’ve saved and gotten yourself in the best financial situation possible, you will be on your way to buying your dream home in the great state of Texas.
Have Questions? Ask Rene!
