It’s the biggest reason to make a big down payment on a house

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Putting down a large down payment is a good thing.


Key points

  • There are several downsides to buying a home with a small down payment.
  • The most important reason for a large down payment is that you can avoid owing more than the value of the house.
  • Being underwater on your house is a bad situation.

Many mortgage lenders allow people to buy a home with a low down payment. In fact, some conventional lenders allow you to deposit as little as 3% of the home’s value when you qualify for a mortgage to purchase a property. And there are some government guaranteed loans, such as VA loans, where there is no down payment mandate and you can borrow 100% of the home’s value.

While a small down payment might sound good since it allows you to buy a property sooner without having to spend months or years saving up, it’s actually a bad idea in many cases. This is true even if mortgage lenders allow it.

There is a very important reason why most borrowers should try to make a large down payment before moving forward.

A large down payment is important to minimize this huge risk

The main reason you would want to make a large down payment on a home is to make sure that you don’t owe more money for the property than you would be able to sell it.

If you borrow the full amount you are paying for the home, or close to that amount, you could be in for a very serious problem if the value of the property drops even a little. It takes a long time for your mortgage balance to decrease by a significant amount at first because most of your prepayments are just for interest. So if property values ​​drop even slightly, you could have such a large mortgage balance even after a few years that you owe thousands of dollars more than you could sell your home.

This is a very bad situation you are in because if you were to sell the house for some reason you may not be able to do so without bringing some extra money to the table to fill the gap between your loan balance and the market value of your property. Although you can get the bank to accept a short sale – or to accept less money than you owe on the house – if you were to leave in an emergency, it would hurt for a long time. term to your credit. and make the sale much more complicated.

And you are actually at an even greater risk than you think of being trapped in your home, because it can happen even if the property values don’t fall, but if you have to move soon after the purchase and the value of your property has not yet increased significantly. Indeed, when you sell a house, you incur many transaction costs. You usually have to pay a real estate agent a commission plus closing costs, and that can all add up to tens of thousands of dollars more.

You will need to be able to repay your home loan in full and have the money to cover closing costs, and if you’ve made a small down payment, chances are your home sale won’t generate enough profit to make it.

Should you buy a house if you can’t save a lot of money?

Buying a home without putting in a lot of cash can have some benefits, including allowing you to start benefiting from construction equity and property appreciation sooner than if you had waited and saved more money. But you need to be aware of the very serious risk and make a plan to save money in case you need to act quickly before you can sell your home for the funds you need to pay everything you owe and Moreover.

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