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Owning a home instead of renting is often a wise financial move. It allows you to reduce your overall monthly costs while you build equity in real property. The biggest financial hurdle you face before you can buy a home is gathering cash for the down payment. Saving for a down payment requires much financial discipline, and probably quite a bit of time, but it is a necessary step to achieving the dream of owning a home.
How much do you need for a down payment?
At the bare minimum, your down payment must be 3.0% of the purchase price of your home, which is the requirement to obtain a Federal Housing Administration (FHA) loan.
If you are planning to use a traditional lender rather than the government-insured FHA mortgage, it will be wise to shop around and determine loan availability in your area. At the end of 2014, mortgage guarantors Fannie Mae and Freddie Mac started to lower minimum down payments for mortgages they guarantee down to 3% from 5%, which might increase their availability. Individual lenders will set their standards, so you’ll probably find different levels of loan availability between 3% and 20% down payment levels.
If you can manage it, your target down payment should be 20% of the purchase price. That way, you can avoid having to pay mortgage insurance, which will save you thousands of dollars over the course of the next few years. You can also qualify for lower interest rates on your mortgage when you put 20% down. Moreover, the more money you put down, the more equity you will have in your home right away.
What are available sources of down payment funds?
Obviously, your income and any existing savings you have can make up all or part of your down payment. However, you should also consider other possible sources of money for your down payment:
Down payment saving strategies