If you’re planning to buy a house in California, then you might be aware that such purchases involve a pre-approval home loan and down payment. In simple words, a down payment is an upfront payment you need to pay towards the total home cost. The buyer usually gives the money to the mortgage lender. Based on the down payment, they approve the sanctioned loans.
Ideal Rate for Down Payment
The down payment decides what kind of mortgage loans you get qualified for. From the viewpoint of a seller, if you can afford more down payment, you have enough cash to get final approval of the loan. Thus, your chances of closing the deal increase as compared to the other buyers.
There is no maximum limit applicable for the down payment. However, it does impact your financial goals in the long run. It also affects your monthly payments and your savings.
The standard down payment rate in the US is 20%. For instance, if your desired house is valued at $80,00,000 and you make a down payment amount of 20%, then the down payment amount you will be required to pay is $16,00,000. The average down payment varies from 15 to 20 percent.
Different loans ask for different down payments. If you have a minimum credit score of 580, you can make a minimum of 3.5% down payment on FHA loans. VA loans allow zero down payment. The USDA loans, targeted toward the low-income buyers of rural areas, also have zero down payment. However, conventional loans will never provide you with this facility.
How Does Down Payment Affect Your Home Loan?
The down payment is inversely proportional to the home loan amount you have to pay. This means, if you pay the more down payment, you can apply for a smaller pre-approval home loan. This also indicates less interest to be paid.
Larger down payments mean lower LTV. To calculate LTV or loan-to-value ratio, you divide the loan amount by the fair market value of the home.
Lenders use the LTV to the borrower risk as well as price mortgages, which means, if you have a large down payment, your interest may get lowered. Additionally, you might also save some additional costs.
For instance, if the LTV ratio is more than 80%, the value of your down payment comes down to less than 20%. Additionally, depending on the loan type, you may even have to pay private mortgage insurance (PMI). Thus, you can expect higher rates in that case.
To Sum it Up
If your down payment is lower than 20%, there are some drawbacks you’ll have to face. These include buying private mortgage insurance, paying a higher interest rate, and facing more competition. Thus, try to pay a minimum of 20% down payment, keeping in mind your financial condition.
Try to save for down payments. Start early planning. Trim unnecessary costs. Try to skip vacations for a year or so. Make savings regularly. Try to start the savings as soon as possible. This will also help you to get a pre-approval home loan to buy a house in California.
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