We have many potential buyers who have excellent income, excellent jobs, excellent credit but just not a lot of savings for a down payment to buy a home. So the bottom line question is how much money do you need to have saved in order to buy a home? I decided to ask Jen Orner, a loan specialist with Prime Lending, to help us answer this question.
Jen has previously shared her expertise in Lending Expert Tips On Credit Reports & How To Qualify For A Mortgage and Buying A Home In The Baltimore Area? Go Local!
How Much Down Payment Depends on the Type of Loan
The type of loan that you apply for may determine how much cash you need for a down payment to buy a home and how much the seller can contribute.
First, we have to pull credit and get an idea of how much money you really want to use towards a home.
Not how much you have, but how much you actually want to use. Typically, we don’t advise you to use every cent in your bank account or liquidate your 401K unless you are very knowledgeable about the pros and cons and you really feel this is the best route for you.
FHA Loans
If you truly have limited cash, we would probably recommend an FHA loan - see Lending Terms: What Does A First Time Buyer Need To Know? - (especially now that mortgage insurance rates dropped effective 1/26/15 to be competitive with conventional loans).
- A 1st time buyer needs to have a 3.5% down payment when using an FHA loan. For example, that is $7,000 on a $200,000 home, $12,250 on a $300,000 home, or $14,000 on a $400,000 home. The seller can pay all of the buyer's closing costs on most purchases in Maryland (up to 6% of the price of the house).
- Typically in those price ranges, buyers may be competing against other buyers who are making larger down payments and may not need much seller help. Therefore, in order to be competitive, a prospective buyer may only be able to ask for the seller to make a $5,000 contribution or pay a portion of the closing costs instead of all of the them.
- In that case, I would tell a person buying in the $200,000 range, that they’d need to be prepared to access about $12,000, which would be enough for 3.5% down plus $5,000 of closing costs.
On a $300,000 house, this may be more like $17,000 and on a $400,000 more like $19,000 or $20,000.
Of course, this all depends on how popular the house is, how competitive your offer is and what the seller is willing to do to make the deal happen. A lender will allow a buyer to get in with just 3.5% out of pocket if the seller pays all of the other closing costs. However, a seller may not agree to this. So just because it can legally be done does not mean that a seller will agree to it.
1st Time Buyer Grants or Interest Free Loans
1st time buyers who attend home ownership counseling and meet certain income qualifications can get a conventional, FHA or VA loan through the Maryland Mortgage Program. You could be eligible for a $5,000 interest-free loan that you can use toward down payment and/or closing costs.
What is a 1st Time Home Buyer?
A 1st time home buyer is someone who has not been on the title of a home in the past 3 years (there are some exceptions to that rule in “targeted areas,” like Baltimore City). There may be additional grants available to certain individuals but they have many limitations, i.e., you must buy in certain zip codes, work for certain employers, or sometimes meet more stringent income limitations.
The vast majority of 1st time buyers just use the $5,000 interest-free down payment assistance loan but some buyers may use some extra funds that their employers make available. This is worth looking into.
To Truly Determine How Much Down Payment You Need To Buy a Home, Call Us!
The vast amount of information and the variety of loan programs make it difficult to answer this question easily. We did our best to give you some information, but to really answer your question correctly, give us a call. Each family, each situation is unique and we want to give you the individual attention and information that you deserve so that you can make the best decision for you and your family.
Here's how to contact Jen Orner.
Here's how to contact me. I look forward to helping you.
