Don’t let a low down payment hurt your overall financial picture.
- Ideally, homeowners will put down a 20% down payment to avoid private mortgage insurance charges.
- Not all homebuyers have to pay 20%.
- Suze Orman says it can be okay to deposit less, but only if you take a few key steps first, including building an emergency fund.
If you’re thinking of buying a house and you’re going to get a mortgage to do so, ideally you’ll want to put down a 20% down payment. This means depositing $20,000 for every $100,000 of home value.
A 20% down payment allows you to avoid having to take out special insurance, called private mortgage insurance. PMI protects mortgage lenders from losing money if they have to foreclose. Since loans with 20% down payments aren’t as risky, putting that much money down also allows you to get better rates and borrow from a wider selection of loan providers.
Unfortunately, it can be difficult to save enough to save that much. If you’re thinking of buying a house with less than 20% down payment, it might not be the worst idea in the world, because you can get into a property and start building equity and benefiting from property appreciation. But, you don’t want to move on unless you’re in a good position to do so.
Finance expert Suze Orman recommends a few key steps you should take before buying a home with less money. Here is what Orman said.
Four requirements of Suze Orman to buy a house with little money
While Orman explained that she “always had a rule of thumb that you should put in at least 20% so you don’t have to pay PMI,” she acknowledged that people who really want to own as soon as possible don’t don’t necessarily have to wait until they can. She thinks it’s okay to go ahead with a 10% deposit if you meet four key criteria:
- Saving a Fully Funded Emergency Fund: Orman advised saving enough money to cover eight to 12 months of living expenses. A large emergency fund will help cover repair bills and allow you to pay your mortgage even if your income drops. You’ll also be better prepared to cover any repair costs that may arise once you become a homeowner.
- Paying off your credit card debt: If you’ve paid off your consumer debt, you should be able to qualify for a mortgage more easily, as your debt-to-income ratio is an important factor considered by lenders. Having no further debt payments will also make it easier for you to ensure that you can cover your mortgage.
- Full funding of your retirement accounts: Orman cautioned not to jeopardize your ability to earn your full employer or reach your retirement savings goals by buying a home that interferes with your ability to invest for the future.
- Ensure the stability of your income: Finally, Orman stressed the importance of making sure your job is secure so you can continue to receive the paychecks needed to pay your mortgage bills.
By meeting these requirements, you can ensure that even with a small down payment, you are in a good financial position to take on the responsibilities of home ownership. But if one of them is missing, you might want to wait until you get all your ducks in a row. “If you think this will do [you] rich in house and poor in money, I would wait until then,” advised Orman.
Should we listen to Orman?
Orman made some solid points and provided great insight into the crucial steps needed to be ready for homeownership, especially when you’re not putting down a large down payment.
The reality is that the risk is greater when you commit to buying a home with no down payment of at least 20%. You could find yourself owing more than the home is worth or having a harder time making the payments due to the larger loan amount. You don’t want to find yourself in this situation, so following Orman’s recommended steps before moving forward is the smartest decision you can make.
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