When determining the amount of money to put down on a home, we consider a few things including the amount required to qualify for the program, as well as alternatives to putting any excess money into the home as part of the down payment. Below I will address each of these.
Down Payment Requirements
- VA Loans – Qualified veterans are able to purchase a home with $0 down payment.
- Utah Housing – First time homebuyers with income below the Eligible Income Limits established by Utah Housing may qualify to purchase a home with $0 down payment.
- FHA Loan – Requires a down payment of at least 3.5% of the purchase price of the home.
- Conventional Mortgages – A minimum down payment of 5% of the price of the home is generally required. However, when the down payment is less than 20%, the borrower is required to pay monthly mortgage insurance or pay a one time fee to byout the mortgage insurance.
Alternatives to Making a Large Down Payment
If a buyer has a larger down payment than what is required to accomplish their payment, cost of financing, and equity objectives, there may be safer and more beneficial uses for available funds than increasing the equity in the home.
I only consider making a down payment above the minimum after the following three objectives have been met:
- There is a minimum of six months cash reserves remaining to protect against unexpected life challenges as well as opportunities.
- When all consumer debts are paid off.
- When the borrower is currently on track to meet retirement goals.
If you are considering liquidating cash from an investment account to make a large down payment, consider the following example of a $100,000 loan vs. a $100,000 investment:
- $100,000 borrowed at 6% over 30 years will require 360 payments of $599.55, or $215,839 over the life of the loan.
- $100,000 invested earning a return of 5% will be worth $432,194 in 30 years.
Cash flow management is one of the most important personal finance objectives to consider when buying a home. A primary reason people struggle financially is due to investing their cash flow in servicing consumer debts and depreciating assets vs. appreciating assets. Homes will appreciate over time and can generally be considered a tool to increase net worth.