From Wrightsville Beach to Carolina Beach to downtown Wilmington, the housing market in southeast North Carolina is bringing homebuyers many challenges as we approach summer 2022.
Homes are still being snatched up within a day or two. Prices are still climbing. And local home options are still relatively sparse.
It’s become more important than ever for potential homebuyers to make sure they actually have enough money for a down payment. Why? There are a few reasons:
- So they can be quick to act if they find a home they like.
- So they can avoid getting their hopes up in homes they simply can’t afford.
- So they can set realistic budget expectations.
- And, ultimately, so they can stop themselves from making an unwise financial decision.
But how can you tell whether you have enough money for a down payment?
Benefits of a Large (20%) Down Payment
There are a few reasons for the overwhelming preference toward a larger upfront payment:
- No Private Mortgage Insurance (PMI). Loaning your money for a home purchase is a risky move for any mortgage lender. PMI protects your lender if you cannot afford to pay off your loan. If you start with a large down payment, most lenders won’t require such risk insurance.
- Lower Interest Rates. Your interest rate is the percentage of your outstanding balance (or principal) that your mortgage lender charges each month simply because you borrowed from them. Lenders base this rate on the amount of risk they feel they are taking on by giving you a loan. A higher initial down payment proves that you’re less of a risk to the lender, making them more likely to offer a lower interest rate.
- More Affordable Monthly Payments. Lower risk for your lenders means lower interest rates for you, which means lower month-to-month mortgage payments.
- Extra Edge Over Competing Buyers. Especially in the hot 2022 seller’s market, you’ve got to do everything you can to stand out against other interested homebuyers. Sellers are more likely to give you the contract if they trust you are financially sound and can actually afford to pay for the house.
Is a 20% Down Payment Really Necessary?
Widely accepted as the IDEAL down payment amount, 20% can feel pretty daunting–or even impossible–especially since the average Wilmington home is selling for well over $200 thousand. It’s enough to make many potential buyers put off their home search for years.
So, it’s a good thing that most lenders DO NOT actually require 20% down on your closing date.
If you CAN afford to pay 20% of the closing costs upfront, by all means, do it! But, if you’re one of many who simply cannot come up with that large an amount, stick with us. You have other options!
Buying a Home With Less Than 20%
Whether you just don’t have that much money or you’d rather hold on to some cash for emergencies, home repairs, or other expenses, a 20% down payment may not be your best bet.
Certain loans allow you to opt for down-payments much lower than 20%. The amount down ultimately depends on the loan and type of home (primary, secondary, or investment) you’re purchasing.
The most common home loan, Conventional Loans, are left entirely to the individual lender’s discretion. With a credit score of 620 or higher, you can secure down payments as low as 3%. This down payment percentage increases as you get into second homes and investment properties.
Meanwhile, FHA Loans–government-backed loans with more lenient financial requirements–are a plausible option for buyers who have credit scores in the 500 to 580 range. With an FHA loan, you could look at 3.5% down.
Veteran-specific VA Loans and rural community USDA Loans offer alternative possibilities for certain homebuyers.
Ultimately, It Depends on Your Budget
Buying a home is a financial risk–and even more so if you drop 20% in the very beginning. The money is extremely challenging to get back.
That’s why homebuyers MUST assess amply their financial situation and determining how much money they can reasonably fork up come closing time. Remember, you should NEVER buy a home unless you feel comfortable with your loan and the amount you’ll have to pay month-to-month.
And you may even be surprised! Considering your monthly rent expenses, it can actually be more affordable long-term to take the leap and buy a home now.
A Network Real Estate Agent Help!
Bring us your loan and down payment questions. Our agents are glad to help you navigate the home-buying process, from the initial search to closing. Reach us today at 910-395-4100.