Determining Your Down Payment Size When Buying a Home in Washington

We’ve written about the down payment requirements for different types of mortgage loans in the past, along with the average down payment size across Washington State. But those numbers might not apply to your particular situation.

As a home buyer, you’ll want to determine the best down payment amount for yourself, based on your budget and long-term goals. So let’s talk about how you might actually do that.

How Down Payments Work

A down payment is an upfront investment made toward the purchase price of a home. It reduces the amount you need to borrow from the lender and demonstrates your commitment to the purchase.

A larger down payment offers advantages like lower monthly payments, reduced interest costs, improved loan terms, and potential avoidance of mortgage insurance. A smaller down payment, on the other hand, can provide greater flexibility, allowing you to keep funds available for other investments or financial goals.

What Amount Is Right for You?

Only a small percentage of buyers can afford to make an all-cash purchase. Fortunately, you don’t have to do that.  And that’s where the down payment comes into the picture. While the size of the investment varies, most home buyers in the state of Washington make a down payment of some kind.

Different types of mortgage loans have different requirements when it comes to the minimum down payment amount. For example, conventional loans might allow borrowers to invest as little as 3%, while the FHA program requires 3.5% or more.

So, how did you determine the right size of down payment for your particular situation?

If your primary goal is to reduce the upfront expense associated with a home purchase, you’ll probably want to go with the minimum down payment requirements mentioned above.

But if you can afford to put more money down, you could enjoy numerous benefits including a smaller monthly payment, faster equity growth, and possibly no mortgage insurance.

Here are some of the most important steps to take when deciding how much to put down on a house in Washington:

1. Assess Your Financial Situation

Begin by assessing your financial situation. Evaluate your income, expenses, and debt obligations. Consider your overall financial health and stability, including your emergency fund and retirement savings. This kind of financial self-assessment helps pave the way toward the next step in the process, which is budgeting.

2. Set a Realistic Home-Buying Budget

The next step is to establish a realistic home-buying budget for yourself, based on the analysis mentioned above. You don’t want to end up with a monthly mortgage payment that stretches your budget to the limit or creates financial hardship. To avoid this, take a good hard look at your current financial situation, especially your income and recurring debts.

Here are the basic steps for creating a home-buying budget:

Determine your monthly income and expenses. This includes your take-home pay, as well as your regular monthly expenses such as rent, utilities, transportation, food, and debt payments. You want to determine how much money is coming in each month, and how much is going out to cover your monthly recurring debts.

Estimate your maximum monthly mortgage payment. A general rule of thumb is to keep your monthly mortgage payment at or below 28% of your gross monthly income. But that’s not written in stone. You can use a mortgage calculator to estimate your monthly payment based on the purchase price and different down payment amounts. An even better strategy? Contact our loan experts to receive an actual mortgage quote!

Factor in other homeownership costs. In addition to your monthly mortgage payment, you’ll also need to consider other costs associated with homeownership. These can include property taxes, homeowners insurance, and property-related maintenance and repairs.

Create a budget that fits your needs. Once you know your maximum monthly mortgage payment and other homeownership costs, you can create a budget that fits your needs. This budget should include all of your monthly income and expenses, including your mortgage payment.

Creating a basic budget helps you determine the maximum amount you’re comfortable paying each month. This in turn can help you determine how much of a down payment you might need to make when buying a home in Washington.

3. Understand How LTV Affects Mortgage Insurance

The loan-to-value (LTV) ratio is an important factor that can help you determine the right down payment amount. The LTV ratio is calculated by dividing the loan amount by the appraised value of the property, and is usually expressed as a percentage.

For instance, with a home value of $500,000 and a mortgage loan of $350,000, the LTV ratio would be 70%. This means the loan represents 70% of the property’s value, with the borrower having a 30% down payment or equity.

With a conventional mortgage loan, an LTV ratio higher than 80% usually requires the borrower to pay private mortgage insurance (PMI). This can increase the size of your monthly payments. If you’re trying to avoid paying PMI, you’ll want to make a down payment that keeps the loan-to-value ratio below 80%.

Home buyers in Washington can also avoid PMI by using two mortgage loans, so that neither one of them exceeds an 80% LTV ratio. But that’s the subject of another article.

For now, just realize that your down payment affects your loan-to-value ratio, which in turn can determine whether or not you have to pay for mortgage insurance. So this is another important consideration when deciding how much money to put down on a Washington home purchase.

4. Factor in Closing Costs and Other Expenses

In addition to the down payment, consider closing costs and other expenses associated with homeownership. Closing costs include fees for appraisals, inspections, title insurance, and more. Estimate these costs and include them in your down payment calculation, so that you understand the total cost of buying a home. Also, consider ongoing expenses such as property taxes, insurance, and maintenance.

5. Talk to a Knowledgeable Loan Specialist

Need help figuring all of this out? We’re here for you. Sammamish Mortgage offers a wide range of home loan options, some of which have flexible down payment requirements. Please contact our staff if you have financing questions or would like to apply for a loan.