Buying your next home can be one of the most significant steps toward solidifying your financial future! If you are thinking about purchasing a second home—congratulations—you are building wealth for your family for generations to come! 

However, to get ready for this, you might be wondering how much you should save to afford it. Whether you will use the profit of your current home’s sale or save up from scratch (or both), one of the biggest determinators of how much you need to put down is which type of mortgage loan you will apply for. Below, we discuss the various types of mortgage loans and what they require from you, the borrower. Keep in mind that these aren’t the only loans that are out there—they are just among the most popular and easy to navigate! 

Down Payment 

First, let’s define what a down payment is. A down payment is a lump sum of money given to a loan provider to help show that you are capable of paying the full loan amount. Remember, if you default on your loan, the lending institution will take your down payment to compensate for their investment loss. 

Requirements

You might have heard that you need 20% of the total loan value in available cash, but that isn’t always the case. In fact, in 2021, the average down payment for a home ranged from 7-17% of the mortgage value. That’s good news if you don’t have significant funds coming from your home sale or in your savings account! If putting down less than 20% sounds like an option you’d be interested in, keep reading to see some of the loan options that could be available to you.

VA loans 

These loans are specific to military members and their qualifying spouses. Typically you will not need to provide any down payment to get approved for this loan. 

USDA Loans 

These are loans for buyers in rural America. These loans require as little as 0% down if you fall into their requirements. It’s good to note that all rural areas are accepted into this lending program. If you live in a suburb, you might also qualify for this loan, so make sure to check out your local USDA eligibility map. 

Conventional Mortgages 

These are the most common type of home loans, and they aren’t backed by the government. Instead, they were created by Congress to provide stability and affordability to the housing market, and they follow the guidelines of Freddie Mac and Frannie Mae. If you go this route, you may only need 3% for a down payment.

FHA Loans 

FHA loans are loans backed by the Federal Housing Administration. If you have a credit score of at least 580, you may only need to put 3.5% down on your home loan. If you have a credit score between 500 – 579, you must pay 10% towards your mortgage. 

Jumbo Loans 

These are loans that aren’t within the branches of the Federal Housing Finance Agency’s loan limitations. These down payments can be 10% or above to counteract the risk they are taking. 

How Should You Choose? 

Ideally, you should put down enough money to satisfy your lender but not zero out your savings account. Putting down an appropriately sized down payment should also consider your current financial status. You wouldn’t want to put yourself in a bad financial position and be unable to afford any repairs or improvements to your new home. 

Talk to the Experts

Thinking about purchasing a home, or curious how much you can afford? Start here! EmpowerHome Team Mortgage can shop multiple lenders with one credit pull, so you get the best rate without the hassle. We are passionate about helping you purchase your dream home and are happy to help guide you through the financial responsibilities involved in a mortgage. Give us a call today at 980-294-4523 or visit us online to get started on your home-buying journey!