Buying a Home: Options When Preparing to Make the Down Payment

Home buyers looking to purchase a home often understand that this process is one of the largest financial decision they will make. Buying a home requires a down payment. Although the standard is 20 percent, buyers may qualify to make a smaller down payment, depending on the size of the loan and their credit history. This guide shows buyers the common down payment options, and how they can get the money.

What Is the Minimum Down Payment?

Asking a number of different people about the minimum down payment for a home might yield a variety of answers. For decades, people have considered 20 percent to be the preferred amount to put down on a property. However, with average home prices what they are, having to put down close to $100,000 or more to buy a home rules many people out before they even begin.

As such, there are high-ratio mortgages that will allow a lower down payment. Applicants who meet specific criteria could pay as low as 5 percent down for a mortgage less than $500,000. Those buying Sidney homes with prices higher than $500,000 but lower than $1 million will need to pay at least 5 percent of the $500,000, plus 10 percent of the remainder. Any mortgages exceeding $1 million require a 20 percent down payment.

Why Would Buyers Make a Low Down Payment?

Coming up with a large amount of money to buy a home can be extremely complicated, especially for first-time home buyers. People buying a second home, or interested real estate investments, may be able to take advantage of the equity they accrued in their current home to serve as a 20 percent down payment. Home prices tend to rise over a long period of time, even if they fluctuate from season to season. People who wait longer to make a larger down payment may find that they keep having to save to meet the next year's higher housing prices. A lower down payment could help certain buyers get into a home much sooner than they could otherwise.

Are There Disadvantages to Making a Lower Down Payment?

Of course, there are certain trades that people who make low down payments will have to meet to get the mortgage. For example, they must be able to qualify for the mortgages in the first place. High-ratio mortgages may have stricter requirements for credit, income, or employment history. When home buyers make a smaller down payment, they will have a larger monthly mortgage payment as a result. Anyone who pays less than 20 percent will likely have to pay for mortgage insurance, to protect the lender in case they default on the loan.

How Can Home Buyers Get the Money for a Down Payment?

Many people try to save for a few years to accumulate enough for the down payment, but there are alternatives, particularly for first-time home buyers. The Home Buyers' Plan allows qualified applicants to withdraw as much as $25,000 from a Registered Retirement Savings Plan to help make a down payment. People who make a withdrawal under these circumstances do not have to pay taxes on it, unless they fail to pay it back within 15 years. Anyone considering this option should be sure that they will make the payments in time, and that they can withstand the loss of growth from those retirement funds.

Coming up with the down payment to buy a home is the first hurdle home buyers have to clear. By understanding their down payment options, buyers can start to prepare their finances for the task of homeownership.