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When you are ready to buy your first home, financing this large purchase may seem overwhelming. Getting educated about the homebuying process can help you ensure you are neither overspending, nor over-borrowing. You often hear people say they are saving up for a home. What they usually mean is they are saving up cash to put toward the purchase of a home. This money paid upfront at the beginning of the purchase process is the down payment. It is a percentage of the entire loan and calculating the right amount of down payment for you is an extremely important step in buying a home.

The other thing you should be doing is checking your credit to see how you look to prospective lenders, and making sure your credit scores are strong enough to qualify for a mortgage. Your credit and your down payment are major factors in how much house you can afford.

How Much You Need

To calculate the appropriate down payment on a home, you must consider the price of the home, loan amount and type, method of payment, number of payments, interest rate and repayment duration. Typically, you will have to put down 5% to 20% of the home’s sale price, but anything less than 20% usually necessitates the purchase of mortgage insurance. Overall, it’s important to put down an amount that you can afford, that still leaves you some money as an emergency fund and that makes for an affordable monthly mortgage payment.

How to Save

There are many ways to acquire the funds for a down payment. They include saving from each paycheck, selling your current property and using gifts or an inheritance.

Saving may be the hardest to do. This requires budgeting and spending less than you currently make to set aside money for a home purchase (in addition to emergency fund and retirement savings). Consider limiting unnecessary spending, downsizing, dialing down vacations, turning your hobby into a paid side gig, making contributions automatic and asking for a raise at work.

Home Financing Options

Does it seem like you will never be able to save up 20% of a home price? There is no hard-and-fast rule when it comes to financing your home and there are plenty of low-down-payment mortgage options. From lower conventional options to FHA and VA loans, there are zero and low-rate (like 3.5% or 5%) options. For some of these, you will need to meet certain qualifications or have outstanding credit to qualify. (You can check your credit scores for free on Credit.com.)

When you make your down payment, you are one step closer to owning a home outright.

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