When Buying a Home, Does the Size of the Down Payment Matter?

homes for saleIf you’re thinking about checking out new homes for sale and making your first ever purchase, you might want to pump the brakes a little bit. Before you make any big financial decisions, you’re going to need to have enough money in the bank for the down payment, monthly mortgage payments, closing costs, and all of the other necessities that come with buying a house. This is especially true when purchasing a home for the first time, as the size of your down payment will affect your negotiating position, your mortgage rates, and your financial future.

That’s why you need to enter into the home buying process on secure financial footing, even if that means delaying the process by another six months to a year. So before you rush into the home buying process, it’s important to understand why you need to save your money until you can afford a sizeable down payment.

Finding the Home of Your Dreams

Let’s be honest: if you want to purchase your dream home, then you’re going to need plenty of cash right up front. That’s true whether it’s a luxury townhouse, a large home with plenty of land, or a smaller home in a trendy urban area. Ultimately, unless you have enough money in the bank to make a sizeable down payment, the home buying process is going to be frustrating and disappointing.

If you can only afford a modest down payment, then many of the best homes for sale in your neighborhood of choice will be out of your reach. That can severely limit your options when it comes to square footage, number of bedrooms, and neighborhoods.

What If You Already Have a House in Mind?

Fortunately, knowing exactly what home or neighborhood you want to live in can make the process simpler. Rather than saving as much money as possible, you can contact the seller to find out what kind of down payment is required. Once you have this information, you can work backwards to determine how much money you will need to save.

Your Down Payment Will Affect Your Mortgage Rate

Too many first-time home buyers have rushed into this process only to discover, to their regret, that they can’t afford to maintain their quality of life and make their monthly mortgage payments. That’s because a small down payment will normally result in less favorable mortgage rates. When you are able to make a large down payment, you can usually negotiate better mortgage rates with your lender, saving money in the long run.

Negotiate From a Place of Strength

The current residential real estate market is a seller’s market, which means it’s very easy to sell a home quickly (and for more than the asking price). This state of affairs can also put buyers at a disadvantage, especially cash-poor buyers. 

Let’s say that you find the house of your dreams, but you aren’t the only person making an offer. Typically, buyers who can offer cash or large down payments will win out over buyers who can’t spend as much up front. In a seller’s market where multiple bids are common, it’s essential that you enter into the negotiation process from a position of strength. But if you rush into this process before you can afford a large down payment, you will likely be looking for new homes for sale for a long time to come.

Fortunately, all of this is good news if you already have substantial savings and a good credit score. So long as you take the time to save up enough money for your future home, you can start searching for homes for sale.