How much of a down payment should I save before speaking with a bank?
January 27, 2017 3:03 PM   Subscribe

I am generally stressed out around banks and people trying to sell me things, and I have always rented. But, my partner and I are now at a point where it seems to make sense to purchase a home (higher incomes, more stable jobs, living in a city where we think we will stay put, etc.) I am wondering what's a "reasonable" down payment to save for before we go and talk to someone at a bank.

Based on the market in our area, we have a budget we think is reasonable for what we might spend, but based on that do we need to have the full 20% saved up first or if it's acceptable to start talking to someone first? And if we can go in sooner, what is that point where they will not just laugh at us? (For reference, right now we have saved about 5% of what we think our eventual budget for a house would be.)
posted by rainbowbrite to Work & Money (23 answers total) 7 users marked this as a favorite
I don't think you should buy until you have 10% minimum, 20% if you can bear it. There are ever-larger costs added on under 20% down payment.

However, no one will laugh at you. They will tell you something similar to the above and give you estimates based on your situation. So you can be better prepared later. It's free advice! Don't be shy.
posted by flimflam at 3:19 PM on January 27, 2017

You are allowed to talk to the bank* first about pre-approval and have them run the numbers at various levels of down payment. It's okay to talk and plan, it's not like you get one opportunity to speak with the Mortgage Yoda and then they ban you from the building.

*Most people talk to a mortgage broker, but if your bank is specifically offering some kind of deal you can talk to them. They will promptly sell your mortgage to someone else, though. It is important, though, to make sure you understand the terms of any offer a bank or broker gives you. For that, you may want to consult with a CPA or real estate attorney with the offers you have to choose from and then decide if they are good or bad offers, and if you need to wait or can forge on. It's worth the consulting fee.
posted by Lyn Never at 3:19 PM on January 27, 2017

It depends on your credit history and what the specific lender requires. A FHA loan could be as low as 3.5%. If you have poor credit it could be 10% to 20%. Note you'll also need cash for some closing costs (basically fees for various things) which may be separate from your downpayment.

Having 5% now is pretty good and it's not an issue at all to go talk to lenders. A lender will make a ton of money off of you over the next 25 years so they're more than happy to explain how to make that happen. No one will laugh at you.
posted by GuyZero at 3:20 PM on January 27, 2017 [1 favorite]

5% is good. Don't do less, the FHA loan might seem appealing but you'll pay for it in the end. If you have 20% you'll avoid paying mortgage insurance, but if your credit is good and your debt to income ratio is good, any lender would be happy to talk to you with a 5% down payment.
posted by katypickle at 3:28 PM on January 27, 2017

Mortgage brokers represent a number of different banks and so they can offer you far more choices than a bank, which only has their own products. They can also give you advice about what it make take to qualify for something better - they can be very creative. The tricky thing is that mortgage brokers get paid a commission by the bank so they vary widely in terms of how much integrity they have about placing you with the product that is best of you. So, if you can find someone who is highly recommended, that might be even better than going to bank but you have to be a little careful.

Also, when it actually comes time to get your mortgage, talk to a number of different sources - local credit union, local branch of the national banks, on-line mortgages and local brokers. Some years our broker got us a much better deal, other years the local bank gave us a better deal than anything our broker could find. (We refinanced quite a few times as interests rates dropped in the past decade.)
posted by metahawk at 3:30 PM on January 27, 2017

20% is a magic number in that most lenders do not force you to buy mortgage insurance if you bring more than that amount. So one less monthly cost added onto you payments.
posted by nickggully at 3:43 PM on January 27, 2017 [5 favorites]

In my area, 3% is enough of a downpayment for some conventional mortgage programs. 3.5% for an FHA loan and my area has 0% down loans that are part of a government assistance program.

You can probably have the seller pay for your closing costs.

Essentially, in my area, you could buy the home with 0 down and just pay the inspector $500. In my area, appreciation is strong and if that holds you could refi at 20% equity in 3-4 years.
Loan officers do these loans all day long and if they were going to shame homebuyers for not having enough downpayment they would be out of business. Go to a loan officer that is smart and supportive.

Keep in mind the US government is very volitile right now. The administration has already monkeyed with keeping FHA loans affordable. During the financial crisis the Republicans wanted to get rid of the quasi-federal agencies that back loans (Freddie and Fannie). If they get rid of those agencies, and/or get rid of FHA, the market will be in chaos. I cannot predict any of this but loan availability and rates could change dramatically.

If I wanted to be in my first house in 2017, I would get looking and lock myself in to a nice, low, 4.125% 30 year loan ASAP.
posted by littlewater at 4:08 PM on January 27, 2017 [5 favorites]

I am financially conservative and I wouldn't consider purchasing if I didn't have at least 20%. There are a few factors here, but it is to your ultimate advantage to have a larger down payment. The rates you will be offered depend on how large your down payment is as well as the total amount being financed.

Don't forget that you're going to want to have cash on hand beyond whatever you put towards the down payment, for the many things that will come up (paying for inspections, fees, repairs, insurance, yadda yadda).

I would try to find a mortgage broker you trust, rather than only speaking with a single bank. Actually, I would talk to a broker and investigate other options myself (like credit unions)... basically comparison shop.
posted by danny the boy at 4:08 PM on January 27, 2017 [6 favorites]

Note that what other people would or would not do with a down payment has very little bearing on what you should do, OP. It depends on the prices of houses in your area, your current and future expected cash flow and what your credit is like.
posted by GuyZero at 4:23 PM on January 27, 2017 [4 favorites]

Also remember what this downpayment is for - it protects the bank.
You either protect the bank by providing a large downpayment (20%) or you protect them as you pay mortgage insurance.

Your % down is not a moral judgment of your worthiness.

Make your decision based on what's right and what's affordable for you.

You say your jobs are very stable (yay!) but lots of nice, stable people lost their homes in the financial crisis. So do whatever you can to keep the home affordable and protect yourself. Try to keep some cushion cash in your pocket, too.

If you are in a very competitive market, then having more than 20% down would help in competing with other buyers, otherwise it doesn't matter.
posted by littlewater at 4:33 PM on January 27, 2017 [2 favorites]

Honestly, there is no downside to starting to look at preapproval with the "standard" minimum of 3.5%, either for FHA or one of the many conventional loans that follow the same pattern. Yes, you'll be paying mortgage insurance, maybe a higher interest rate, but you can refi into a no-PMI conventional when you hit 20% equity, assuming housing values haven't tanked and interest rates haven't skyrocketed.

20% is a LOT for a first time buyer without serious family help, inheritance, or top-tier jobs, especially in a metropolitan housing market. I used to think that way; if I hadn't changed, I wouldn't have my amazing house today.

You don't even have to have that amount saved before you go talk to someone. You don't have to sign anything on the spot, and I think most preapprovals aren't even hard credit pulls anymore.

We found our mortgage bank through our RE agent, fwiw.
posted by supercres at 4:43 PM on January 27, 2017 [1 favorite]

If you can't get 20% saved, it is possible to structure your mortgage as an 80-10-10 (80% mortgage, 10% down and 10% 2nd mortgage) to avoid private mortgage insurance. Not all lenders will do it and it can mean your two mortgages carry different interest rates. It's not always the best deal, but it can be, if it brings your interest rates down. You'll be borrowing the full 90% anyway with only 10% down and if the savings in PMI and first mortgage interest rate are not outweighed by the second mortgage interest, it's a good idea, especially if you can aggressively pay down the second.
posted by crush-onastick at 5:20 PM on January 27, 2017 [2 favorites]

We went in with 5% down, and our lender allowed us to take a slightly higher interest rate instead of mortgage insurance. But, that 5% was on a house that cost under $200K. If we were in Southern California or some other more expensive market I don't know if we could have made the same deal, and part of our reason for taking it was that we knew we would be coming into some inheritance a few months after moving into the home -- we've since gotten that money and have already paid off more than half the cost of the house, so our penalty from having a higher interest rate isn't going to amount to much.

Also, yes, pay attention to the total closing costs and what you'll need to have in reserve for the bank to underwrite the loan. If you have less than 20% down, the bank may require you to have 2 months of reserve funds for all your expenses in your account. For us, with a down payment of a little less than $10K, our closing costs plus reserve totaled a bit over $20K.
posted by LionIndex at 5:41 PM on January 27, 2017

We bought our first house with zero down back in the time of "liar loans" and other lending shenanigans. It worked for us but I wouldn't have done it it it hadn't been a relatively cheap house. More down payment is always better, but there are so many variables (including the current political context) that there may not be much you can take from other people's situations.

But yes, even if you end up deciding now isn't the right moment, you can always learn by talking to lenders and agents and it helps to cast a wide net and shop around.
posted by Dip Flash at 6:57 PM on January 27, 2017

I don't have my down payment yet, but I've already talked to a loan officer and have a realtor (who happens to be a good friend, too). You don't have to wait to talk to a loan officer/mortgage broker about getting pre-qualified, etc.

Hopefully you already know your credit score, etc., but if you don't then the broker/officer can advise you on anything that might need to be done to strengthen your credit.
posted by LOLAttorney2009 at 7:20 PM on January 27, 2017

Where I live the minimum deposit you can have is 5% and then you can expect 2% LMI on top of that. My bank told me that you need to have the 5% saved for at least three months before they'll consider lending to you. I would say that you can start speaking to banks and brokers anytime now to start plan. They will not laugh at you, since they will want your business when the time comes.
posted by kinddieserzeit at 7:29 PM on January 27, 2017

(not saying that you will want to buy with 5%, just that it's an option and, therefore, not silly to go to a broker now)
posted by kinddieserzeit at 7:31 PM on January 27, 2017

We used an FHA loan with under 5% down on our first house. It worked out just fine because we bought a very modest house and even with the PMI we were paying the same as rent. And we lucked into buying a house in a part of town that then gentrified and we sold it for enough to be able to put 20% down on our new house just from the proceeds. If you are smart about it, know the extra fees associated and don't buy beyond your means, an FHA loan with very little down is just fine. It will not make you a real estate baron or enable you to pay your house off in 10 years, but it's a perfectly normal thing to do.Most people do not put 20% down on their first home. That's an insane amount of money for the average person.

Though honestly? I would not buy a house right now. The country is too unstable.
posted by soren_lorensen at 8:23 PM on January 27, 2017 [3 favorites]

Any bank will love to talk to you; you are a potential buyer and mortgages are profitable. Mortgage rates are likely to go up, so buying sooner is worth considering. Talk to a credit union, too, they may be more consumer oriented.
posted by theora55 at 4:47 AM on January 28, 2017

Definitely check credit unions. We just refinanced (following the rates down), and I noticed they had many reasonable lower-down-payment mortgages, with a few specific to first time homebuyers. The banks were notably worse.
posted by JMOZ at 6:17 AM on January 28, 2017

I should also mention that in 2007, we started out with less equity (I can't recall whether it was 5 or 10%) and had lender-paid PMI. I don't think that's so common anymore, but good jobs/income and good credit but little cash was considered pretty okay at the time.
posted by JMOZ at 6:19 AM on January 28, 2017

Money down does not just protect the bank. The positive effects for you are that it's a buffer against going underwater and getting completely stuck; your monthly payments will be less, reducing the risk of late payments and foreclosure ; it reduces the size of the loan you're paying interest on, meaning that over time you will pay less interest and therefore less overall to the bank.

If you have 20% down on a 100k house at 4% for 30 years, in the end you'll pay $137.5k for your 100k house (just the mortgage, not taxes, insurance, etc). If you put 3.5% down on that same house, you'll pay $165.9k (not even counting pmi). So your extra $16,500 up front saves you $28k. (I used this calculator). Scaling up, of course, as the home value goes up, and way up as interest goes up. So if your mortgage is at 5%, you'll save $31.9k (again, not even counting PMI).

This may well be worth it and make sense for you, to lock in the home's current price, and depending on your longer term budgeting. But the lower downpayment is not a 'free perk'.
posted by Salamandrous at 7:15 AM on January 28, 2017 [1 favorite]

Response by poster: Thanks everyone -- this is really helpful! I am definitely on the more financially conservative end of the spectrum so personally I don't think I'd necessarily go with only the 5% down for actually buying a house, but it sounds like it may be useful to talk to someone now anyway -- I was just concerned if they would think I was crazy!! :) I also appreciate the advice to shop around and not necessarily just go through the bank -- my parents have their mortgage through their small town bank so I just assumed that's what everyone did...but I guess things may have changed since they bought their house many decades ago! :)
posted by rainbowbrite at 5:23 PM on January 28, 2017

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