What's the Deal with Down Payments?

While conventional wisdom dictates that 20% is the magic number required for a down payment on a home, that soaring figure may make the dream of home ownership seem completely unreachable for many young homebuyers. Between student loans and the rising cost of living in many areas, it's no surprise that many millennials might struggle to save such a sum.

Thankfully, times have changed, and 20% is no longer the requisite amount for a down payment on a home. In fact, first time home buyers only need to worry about saving roughly 3% of a home’s value for a down payment! Plus, many cities and counties offer down payment assistance grants specifically to help first time homebuyers realize their mortgage dreams.

In this blog, we'll discuss the three types of loans, benefits of each, and what you will need to pay out of pocket for your down payment, closing costs, and inspections.

Conventional Mortgage Loans

A conventional mortgage is a loan that is not backed by a federal agency, such as FHA or VA. While it can be more difficult to qualify for a conventional mortgage, interest rates can be as low as 3%, saving you money in the long run. Additionally, buyers who put down 20% or more on their mortgage do not have to purchase mortgage insurance, which is typically required for mortgage loans. You might consider a conventional mortgage if you have a higher salary and a credit score of above 620.

FHA Loans

FHA loans are loans issued by the Federal Housing Administration and aim to help low to middle class families afford housing. Typically FHA loans have slightly easier application standards, but slightly higher interest rates, typically above 4%. You might consider an FHA loan if your credit score is above 500.

VA Loans

VA loans are reserved for current and veteran service members and their eligible spouses. These loans are guaranteed by the Department of Veteran’s Affairs, meaning the government will repay part of the loan should the borrower fail to make payments. Because these loans are guaranteed, often require no down payment, competitive interest rates, and have relaxed credit qualifying scores.

Down Payment Assistance Programs

Depending on the area in which you want to buy a home, you can find down payment assistance based on income. In addition to homebuyer education and financial counseling services, Cuyahoga County’s Neighborhood Housing Service provides a down payment assistance program. This program assists homebuyers who earn under a certain amount, providing up to 17% of the total transaction value.

Out-of-Pocket Expenses

If you’ve saved up enough to put at least 3% down on a house in your price range, great! But there are still a few more out-of-pocket expenses you’ll need to consider. In addition to your down payment, you’ll also need to cover closing costs, homeowner’s insurance, taxes, and the cost of moving. In the state of Ohio, you can expect closing costs to be between 2% and 5% of your home’s total value. On average, buyers spend around $3,700 on closing costs. Additionally, you’ll need to add a homeowner’s policy onto your insurance, the cost of taxes, and of course, the cost of your move. Often, taxes can be incorporated into your mortgage payment, or you could pay them twice a year.