We would hate for you to be surprised about what Lenders are comfortable with as a down payment, when you go to purchase your new home, that is why you should consider the following before you begin:
What is a good amount to put down for your down payment and closing costs?
A comfortable number for most Lenders is at least 20% of the cost of the home. To most Lenders, that is a magic number, as it is big enough to protect them if the loan is goes into default..
For example, if a buyer were to put down 10%, and property values drop by 5%, and the buyer defaults. When the property is foreclosed on, the Lender is responsible for paying a real estate commission, transfer tax, and other expenses of the sale, and will be in the hole. Lenders have found that they are less likely to lose money when the buyer puts down at least 20% of the property value.
Most people plan to borrow money from a bank, or a Lender. If you are unable to put 20% down, most will require you to pay for what is known as Private Mortgage Insurance (PMI).
Although PMI will typically increase the cost of your loan by several hundred dollars annually, it protects the Lender if you default. Also, if your down payment is less than 20%, your loan terms generally won’t be as good, meaning higher up-front fees, and/or a higher interest rate. So, just because you can not accumulate the 20% that most lenders are comfortable with, does not mean that you will be turned down for the loan. It does mean, however, that while you may not be turned down,in the long run, it will be more expensive for you.
PMI is not a permanent cost. If you can prove that you have at least 20% equity (home value minus outstanding loan balance) in the property. That can come from paydown of the loan, improvements or renovations that improve the value of your home, appreciation, or any combination thereof. Also, for the PMI to be removed, most lenders will require you to pay for and have an appraisal of the property.
If these choices are not an option to you, then you may consider setting your sights a little lower. 20% of a small number is an even smaller number. If the down payment and closing costs that you will need for a $150,000 home are pushing the limit, perhaps consider a $120,000 or $100,000 house.
If you have excellent credit, Lenders may be able to put you into a program where you can put down as little as 3-10%. PMI will probably still be a requirement, however.