How much should I put down to buy a $300-400k house?

August 21, 2022
Topic of the week: How much should I put down to buy a $300-400k house? It's my first house, I live outside of Nashville, still have a full-time remote job, and make about $90,000 after-tax as a single person. Thanks in advance.

Exciting times 🥳 I'm also in the process of saving for my first place, so I'm going to share a few things that I'm thinking about that might help you on your home-buying journey:

First, I would break down your personal cash flow. So with $90,000 after-tax, that means you bring home about $7,500/month.

When thinking about how much home you can buy, you want to consider your "debt-to-income" levels. It's generally recommended to keep your debt under 35% of your total income.

So for your situation, you may not want to be paying more than $2,700 towards a mortgage or other debts each month.

Your personal comfortability with debt can lead you to spending more or less than the standard rule of thumb, but those numbers give you a rough starting point to start calculating different mortgage & down payment options.

Personally, I'd use Google's Mortgage Calculator to play around with different down payment amounts & interest rates:

For example, let's look at the numbers on a $300,000 home:

  • If you put 3.5% down ($10,500) with a 6.9% (nice) interest rate, it creates a $2,545 monthly payment. Based on the debt-to-income rule of thumb, that'd fit into your budget as the payment would be roughly 33%
  • If you put 20% down ($60,000) and got a 6.6% interest rate, the monthly payment would be just under $2,000. A higher down payment will create a lower monthly payment, but you have to have a relatively large amount of savings on hand to make this happen.

Also, given where interest rates are at right now, it's worth noting that the less you put down, the more expensive the total cost of the home will be (because you'll have a larger outstanding loan balance being charged interest each month).

Standard advice says that you always have to put 20% down, but there are few different options that can make sense as well. This could be a separate post in itself, but here's a quick breakdown of different mortgage types:

Conventional - the standard loan that your parents most likely got when they bought their first home. Typically requires 20% down.

Conventional (with PMI) - contrary to popular belief, you can put down as little as 3% with a conventional loan, but you'll have an additional cost - Private Mortgage Insurance - until you reach 20% equity in the home

FHA - these loans are first-time homebuyer friendly as you can put as little as 3.5% down while having a credit score as low as 580

USDA & VA loans - you have to meet stricter requirements, such as being a veteran or living in a rural area, but these two types of loans offer as low as 0% down

Also read: Down payment assistance programs in every state

When going through the home-buying process, working with a good agent and loan officer can make a world of difference. Don't be afraid to ask for help or ask plenty of questions - it's their job to find you a home and get you financing.

Outside of the home itself, consider your other savings goals and your income trajectory. And don't rush into buying because your friends are. Buying a home is a big life decision—probably the biggest purchase you'll make in your life—so take some time to think through all the different scenarios and lifestyle changes that could happen.

Remember: you can typically always put more towards your principal and pay down the home quicker to make the mortgage cost cheaper. You can also sell it in the future. Buying a home doesn't mean you're stuck there forever, it'll just cost some money is revert back from the decision (cost of selling, closing fees, etc).

So overall, if you decide that buying a home is the right choice for your situation, the main thing I would consider is what you'd like your mortgage payment to be and how much you can afford each month because you can influence what that monthly payment is with how much money you put down.

⚠️ Also: Don't forget about closing costs, fees, and the cost of moving into and furnishing a new home when budgeting for the down payment. These can typically be anywhere from 1-5% of the cost of the home.

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