FHA Loan Down Payment is one of the most important aspects of home loans. Nearly all kinds of loans require you to pay a down payment, which can be quite a lot. Conventional loans and FHA loans, two of the most commonly acquired loans, also have down payment requirements.
The two loans have a minimum down payment requirement of 5 percent and 3 percent, respectively. Moreover, if you cannot pay at least a 20 percent down payment of the full loan, you are also required to buy mortgage insurance.
Mortgage insurance is commonly called MIP on FHA Loans and PMI on conventional loans. It typically adds an additional .5 to 1 percent of the full loan amount to your home mortgage annually until the loan is 80 percent paid off.
To get a low-interest rate on these loans, I highly recommend paying the complete 20 percent down payment requirement. But this means paying off a large sum from your pocket. Typically, it is in thousands. So how do you begin to save this much money?
Here’s a small guide on saving money for FHA loan down payment, as well as a few sources to help you save.
How Much Should You Exactly Save for a Down Payment?
- As we mentioned before, it is a good idea to have a 20 percent down payment ready when you acquire an FHA or conventional loan to avoid having to buy mortgage insurance.
So for instance, if you are buying a home that is priced at $200,000. You should have at least $40,000 cash on hand for the down payment. Keep in mind this does not include other expenses, including closing costs.
- But the best thing is that the down payment you’ll pay for the home mortgage will not go anywhere. It will sit in your house, and when you decide to sell your home, you’ll receive the full amount back as a part of your equity.
Although it is best to have a 20 percent down payment ready in your hand. However, there is no hard and fast rule that you shouldn’t go for a loan if you don’t have much money in your hand. Sometimes it is just better to put a small down payment amount and acquire a loan. Every situation is different, so you should decide based on each option’s short-term and long-term benefits.
- If you cannot save 20 percent down payment for conventional or FHA Loans, consider looking into VA loans offer lower down payment requirements than conventional loans.
How to Save Money for FHA Loan Down Payment
- Most people arrange for down payments through cash savings. If you have enough cash saved, see how much you can easily save every month for a house. Next, calculate how much time it will take you to save the 20 percent down payment amount.
Again, for instance, if you are eyeing a house valued at $200,000. As a rule, you should at least have $40,000 cash in hand to avoid having to buy mortgage insurance. By the way, if you save at least $1,000 a month. It can take you up to three years and four months to complete 20 percent down payment cash in hand. Figure out the best way you can save the money according to your financial circumstances.
- Keep in mind you’ll also need money for health, family, and other concerns while you are saving. You should never keep the saved money in a regular saving account because it will earn very little interest and won’t help you save faster.
Instead, go for a high-yield savings account for holding the down payment funds. You will get a bit more interest this way compared to a regular savings account.
- If that doesn’t work for you, try a certificate deposit as well. You will have very little flexibility with it, but the yields are quite attractive.
Use Retirement Plans as a Way To Save for Down Payments
- If you are saving money in your retirement account, you can tap the account as a source of funds for the 20 percent down payment requirement. Some form of 403(b) and 401(k) retirement plans allow individuals to borrow money directly from the account to purchase a new home.
And if you have an IRA account, you can always withdraw the money, especially if you are a first-time homebuyer.
- The good news is that a 401(k) loan is never counted towards your debt-to-income ratio when you set out to get a home mortgage. It also does not affect your credit score. However, if you fail to repay the loan, there are very tight consequences.
You may end up paying income taxes on the amount you borrowed from your 401(k). You may even incur an early withdrawal penalty of 10 percent or less. And worst of all, if you quit your job while you are repaying the loan, you will only have 60 to 90 days to completely pay it off.
- These are just some of the considerations you must consider before acquiring a conventional or FHA Loan. If you are unsure whether you will pay the full down payment, and you still want to acquire a loan at lower interest rates, contact Aceltis Group.
Our mortgage experts have plenty of lender partners in the wild who are willing to offer home mortgage loans at very low interest and downpayment requirements.