Don’t let a low down payment hurt your overall financial picture.
- Ideally, homeowners will make a 20% down payment to avoid private mortgage insurance costs.
- Not every home buyer has 20% to put down.
- Suze Orman says it can be OK to put down less, but only if you take a few key steps first, including saving up an emergency fund.
If you’re planning to purchase a home and are going to get a mortgage to do so, ideally you will want to make a 20% down payment. This means putting down $20,000 per $100,000 in home value.
A 20% down payment allows you to avoid having to buy a special type of 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 so much down also enables you to get better rates and to borrow from a broader choice of loan providers.
Unfortunately, it can be hard to save enough to put down so much. If you’re thinking of buying a house with less than 20% down, this may not be the worst idea in the world as you can get into a property and start building equity and benefiting from property appreciation sooner. But, you don’t want to move forward unless you’re in a good position to do so.
Finance expert Suze Orman recommends a few key steps you need to take before buying a home with less money down. Here’s what Orman said.
Four Suze Orman requirements for buying a home with little money down
While Orman explained that she’s “always had a rule of thumb that you should put at least 20% down so you don’t have to pay PMI,” she acknowledged that people who really want to become homeowners ASAP don’t necessarily have to wait until they can do that. She believes it’s OK to move forward with a 10% down payment if you meet four key criteria:
- Saving up a fully funded emergency fund: Orman has advised saving up enough money to cover eight to 12 months worth of living expenses. A large emergency fund will help you cover repair bills and ensure you can pay your mortgage even if your income falls. You’ll also be better prepared to cover any repair expenses that can arise once you become a homeowner.
- Paying off your credit card debt: If you’ve paid …….