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Home buying 101: The lowdown on down payments

Posted on September 6, 2013
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Mortgage-down-payment

If you're getting ready to buy a home, it's important to see if you're ready and able to make the down payment.

What's the down payment?

It's the amount of the purchase price you'll pay at your loan closing. The rest of the purchase price is then financed into a mortgage loan. Be sure to note:

  • The more money you have available for a down payment on your home, the less you'll have to borrow.
  • Your down payment amount can influence the financing options and interest rates available to you.

Keeping your down payment amount down

Today there are financing programs with lower down payment requirements for qualified applicants, such as:

  • VA loans with low- and no-down-payment options for veterans
  • FHA loans with a 3.5% down payment requirement

Keep in mind - if you make less than a 20% down payment, you'll likely be required to purchase mortgage insurance (MI), adding to the cost of your loan and increasing your monthly payment. The premium for mortgage insurance, which protects the lender if you're unable to make your mortgage payments, is generally added to your monthly payment.

Help from other sources

Some loan programs allow you to use monetary gifts from family or friends as part or all of your down payment. Please note that:

  • You may be required to provide written proof that the funds were truly a gift and not a personal loan.
  • There are limits on how much gift money you can receive per year without increasing your tax obligations.
  • It's a good idea to speak with a financial advisor, tax accountant and a home mortgage consultant about impacts to your overall home financing plans and future goals.

Assistance is also available through:

  • Groups like Habitat for Humanity.
  • Not-for-profit down payment assistance programs (DAPs). They provide funds to qualified homebuyers to help with down payments and closing costs - and many don't require repayment if you meet their guidelines.

Tips on saving for a down payment

If you're looking to buy a home today, or someday, it's never too early to start building up your personal savings.

  • Pay yourself first. Think of your down payment as a monthly bill. Figure out a manageable amount and set up an automatic monthly transfer from your checking account to a dedicated down payment savings account.
  • Spend less and save more. Separate "wants" from "needs" - keeping in mind that what you want most is a home. The less you spend on what you don't need, the more you'll be able to save for a down payment.
  • Track your spending. Record everything you pay for every month - by item and price. Compare the total to your monthly income. You'll surely find expenses to cut and money to redirect to your down payment savings.


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