Determining Your Down Payment

The down payment. It is one of the most daunting parts of home purchasing, especially for first time buyers. But, it doesn’t have to be. 

The traditional amount one should have set aside for a down payment is 20% of your home’s purchase price. Depending upon how much you’re looking to spend on a house, that can be a pretty considerable chunk of cash.

So how much should your down payment be? There is no “right” answer to that question. It depends on your financial situation, the type of mortgage you choose, and your own personal preferences. Here are some ways to help to figure out the figure.

Debt-to-Income Ratio

“The first thing to do is calculate your debt-to-income ratio,” says Peggy McLaughlin, Sales Associate at ERA Justin Realty. You do this by adding up how much you pay monthly to credit card bills, student loans, rent, car payments, etc. Divide that total with your pre-tax monthly income. This will give you your debt-to-income percentage. “The lower this percentage is, the more comfortable lenders will feel giving you a mortgage,” adds McLaughlin. 

Calculating your debt-to-income ratio will also tell you, and your lender,  how much house you can afford. Your lender will write you a pre-approval letter with the highest amount of a mortgage they are willing to give you.

How Much to Set Aside

“Now you have your target home price,” says Jennifer Darby Metzger, Broker/Owner of ERA Justin Realty, “With that you can calculate not only your down payment but how much you need for closing costs and other unforeseen expenses. There is always something!” Closing costs are usually between 3 to 6% of the balance of your loans. You will also want to make sure you have adequate funds in case something goes wrong in the move or if something breaks in your new house. You want to have enough to cover repairs.

Explore Loan Options

“There are plenty of different types of loans to choose from,” says McLaughlin, “Many do not require 20% down. Some are as low as 3%. Some require no down payment at all.” If you are a veteran, low income, or a first time buyer there are programs available to help you achieve your dream to become a homeowner.”

Weigh the pros and cons. There are advantages and disadvantages to putting down more or less. Peggy McLaughlin or any of the experienced agents at ERA Justin Realty can help find the solution that works the best for you. Give us a call at (201) 939-7500 to get started.