Background: Wife and I are saving to buy our first home. We are looking in an area that cuts out ~25 miles of driving combined per day. Rent is $1,200+ for us now. Home values are $125,000+ and we are fairly sure we can get a good one for $150,000 or so. Mortgage, taxes and insurance would be a good deal lower than our current rent. We both have stable jobs with family and friends here so no sign of moving out anytime soon. Current lease is up end of May. Combined income right at $100,000 and we both have bonus plans on top of that.
We don't have 20% (plus more for closing and stuff) at the moment but would by May. If we go to banks in February to get preapproved without 20% on hand how are we affected? Do we need the 20% before getting preapproved or will we be ok starting that process early and then continuing to save?
You'll get a lot of good guesses here, but the most important thing is to run the numbers on what they actually offer you.
We bought our current place a year ago, and the way I chose to set up the analysis was to get estimates for all the down payment options, and then calculate the return on incrementally higher down payments so I could compare them to our investment options. Our house was $122k, and the smallest DP option was 3.5% (FHA), with a ridiculous $200+ PMI that would never go away no matter how much we paid down the loan. Bumping it up to 10% (another $7930) gave us better rate options and only $32/mo in PMI, for an annual savings of almost $2k - nearly 25% return. Going to 20%, or $24400, would have produced about a 6% return on the additional $12200, which we declined to do (assuming higher market returns would offset the interest). We left the rest of our funds invested, and have been paying slightly extra to reach 80% LTV at the 2-yr point and lose the PMI. Beyond that point, any additional principal payments would return less than 3%, factoring in tax deductions, or effectively 0% after inflation.
Your details will differ; the key is to understand this is a diminishing-returns situation and locate your own personal sweet spot.