November 15, 2018
Thinking about getting pre-qualified or pre-approved for a mortgage loan? FHA mortgages generally require a lower down payment and have more forgiving terms for loan approval, but the amount of money you put down isn’t just guided by your financial qualifications (see below), it also depends on your financial goals.
A National Association of Realtors report from 2017 indicates that a large number of people put down less money than you might think to purchase their dream home.
Some of the zero-money-down transactions are likely either VA loans (available for qualified veterans and dependent on serving a minimum amount of time in uniform) or USDA loans which also have a zero down payment option. But in some cases you may actually wish to make a larger down payment.
Why?
In some cases it’s because a borrower’s FICO scores aren’t high enough to qualify for maximum financing without compensating factors. For example, under FHA loan program rules (and NOT lender requirements which may be higher) you are eligible for maximum financing and the lowest possible down payment if you apply with FICO scores at 580 or better.
If your loan approval depends on compensating factors, a larger down payment is one such factor that can help decide things in your favor.
Another reason you might wish to make a larger down payment is if you have other financial assistance available such as seller-funded closing costs (up to six percent of the sale price) or down payment assistance programs that meet FHA loan requirements.
Why would you want to make a larger down payment when you are getting financial help on your mortgage? The larger your down payment, the lower your principal loan balance will be, reducing the amount you pay in interest over the long term.
But it can also help you get into lower mortgage payments.
Whether that is a priority, and how much lower your payments go as a result of a larger down payment will be important factors to consider. Those who see the reduction in mortgage payments as negligible (again, depending on the size of the down payment) may opt to save more money up front.
And those who do not plan to stay in the home long-term would do well to reconsider a larger-than-normal down payment because the savings aren’t realized in the short term, the large down payment is part of the “long game” of home ownership if you plan to stay a long time.
When in doubt, talk to a loan officer about different strategies for home ownership based on your plans for the new home long and short-term.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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