When Does a Bigger Down Payment Make Sense?

January 2, 2019

If you’re looking at home loan options, especially for the first time, you might wonder why some buyers choose to pay more out of pocket up front on their mortgage loans rather than making the bare minimum down payment and financing closing costs.

What makes some FHA loan applicants decide to do this?

Simply put, the reasons have a lot to do with long-term planning where owning the home is concerned. Do you know how long you plan to live in the house you want to buy with your FHA mortgage loan?

Knowing that answer can be half the battle, especially when deciding about your down payment options.

The math is easy for some; if you plan to stay in the home for a long time, a larger down payment makes sense because you will save money on interest payments over the duration of your mortgage. Paying more upfront keeps your loan balance lower. For long-term homeowners, saving this money over time is worth more than the initial out-of-pocket expenses.

But for those who plan to stay in the house for a few years then put it back on the real estate market, an oversized down payment doesn’t make sense. There is no savings over a 10, 15, or 20 year loan term or more if the borrower sells in year five or six to move into a larger property or one more attractively located in the housing market.

With all this in mind, it’s important to remember that some borrowers will be required to make a larger down payment due to past credit issues or low credit scores. It may be possible to get a home loan with low credit scores, but your lender is likely to require compensating factors such as a 10% down payment instead of a 3.5% down arrangement.

But there are always possibilities for borrowers to find local down payment assistance programs that can help the borrower reduce those out of pocket expenses. Down payment assistance is not available from the FHA itself but state or local agencies may offer help.

When you are in the planning stages of your new FHA home loan, remember that down payment help can come from family and friends, employers, and other third parties but cannot come from anyone who will financially benefit from the transaction. The seller can contribute approved closing costs, but never the down payment.

Ask your FHA lender if you aren’t sure what size down payment you should make or what size your lender will require you to make based on FICO scores and other financial qualifications.

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