Buying a house represents a significant financial decision, and you should make sure you have the ability to purchase the home and pay the mortgage before moving forward. Buying a house creates several upfront costs, including the down payment or deposit on the house and the total closing costs, which can be several thousand dollars or higher. Since the down payment also represents a high upfront cost, it is one of the most important factors in your home purchasing decision.
A down payment is the amount of your mortgage that you must immediately pay when purchasing the house. It represents both a deposit on the loan and an act of good faith--in countries like Australia and the UK, it is often referred simply as a deposit instead of a down payment. The amount is based on a percentage of the purchase price, but this percentage can vary based on the type of loan you are qualifying for.
As a general rule, lenders prefer a large down payment on your mortgage. The larger the down payment you are willing to make, the better loan terms you can get, so you will need to put down a high percentage to qualify for the best rates. Twenty percent is a common figure for many mortgages, but many borrowers settle for 15 or 10 percent and accept slightly worse loan conditions, because they do not have enough money on hand. Try to find a purchase price that represents only three or possibly four times your annual household income. This makes a good price for the 20 percent down payment rate.
Other debts will also have a large effect on your down payment choices. If you have other debt obligations from older loans, you may not have a large amount of cash, or you may need to keep cash in reserve in case you have trouble with your source of income and need extra funds to keep up on your payments. The more additional debt you have, the lower you should make either your down payment or your purchase price. Always factor in the down payment when considering what price to pay for a home.
Low Requirement Loans
Some loans have very low down payment requirements. In Australia, for instance, lenders are sometimes willing to accept no deposit or a deposit represented by other securities besides cash. United States lenders prefer a more substantial down payment, but there are still government programs that offer advantageous deals. FHA, or Federal Housing Administration, loans have required down payments as low as 3.5 percent to help those with low cash reserves.