How Much Should You Save for a Down Payment?

An important decision many homebuyers face is how much money to save for a down payment on their new home. This Largely depends on the mortgage product that you intend on getting, and how much of a mortgage payment you can afford. This is where a mortgage loan officer is vital to have. They are trained to help you answer these questions and navigate which product is best for you.

The biggest factor on your down payment is going to be what the LTV (Loan to Value) maximum is for your desired mortgage product. For example, you can get an FHA loan with only 3.5% down, which means that the maximum LTV you can have for that product is 96.5% LTV. Each mortgage program has a different set of maximum LTV.

For VA loans, you can finance up to 100% of the loan amount which means there is no down payment required at all. However, some people may still choose to put a down payment because it lowers their principal balance which then lowers their monthly payment.

If you are opting for a Conventional loan, another factor to keep in mind is the requirement of PMI (Private Mortgage Insurance). For Conventional loans, if you have an LTV of 80% or above, then PMI is a requirement and because of this, it is best to put at least 20% down. PMI is eligible to drop off once you have paid down your mortgage enough to get to 80% LTV, but until then PMI is an extra expense that you will pay each month that does not benefit you as the borrower at all.

It also makes a difference whether the property is going to be a primary residence, secondary residence, or investment property, and depends on the number of units in a property. For example, some lenders may say that for a single unit investment property they can go up to 85% LTV, meaning that your minimum down payment would be 15%. For a 2-4 unit property the maximum LTV is typically 75%. In this case, the down payment would be 25%. In the end, speaking with a loan officer will help you make the best decision based on the loan product you intend to use and how you can save the most money along the way.

I hope this article helped you understand how to better prepare and save for a down payment on your new home.

Thanks,