How Much Do I Need For A Down Payment?
Your required down payment will mainly depend on the type of mortgage chosen and your finances. Coming up with adequate cash for a down payment is by far the biggest roadblock to home ownership.
Down Payment Explained
A down payment will be the cash you pay upfront to purchase your home, and is typically expressed as a percentage of the purchase price. For example, a 5% down payment on a $500,000 home would be $25,000.
When applying for a mortgage, the down payment is your contribution toward the purchase and represents your initial equity in the home. The lender will provide the rest of the money to complete the purchase of the property.
Lenders require a down payment for most mortgages. However, there are exceptions such as VA loans and USDA loans, which are federal government-backed, and do not require a down payment in most cases.
Down Payment Requirements by Loan Type
Putting at least 20% down on a home will increase your chances of getting approved for a mortgage and will allow you to get the best rate along with avoiding mortgage insurance.
But there are plenty of options if you want to put down less than 20%. The minimum down payment required for a house depends on the type of mortgage program:
- FHA loans, which are backed by the Federal Housing Administration, require as little as 3.5% down.
- VA loans, guaranteed by the U.S. Department of Veterans Affairs, usually do not require a down payment. VA loans are for current and veteran military service members and eligible surviving spouses.
- USDA loans, backed by the U.S. Department of Agriculture’s Rural Development Program, also have no down payment requirement. USDA loans are for rural and suburban home buyers who meet the program’s income limits and other requirements.
- Some conventional mortgages, such as the Fannie Mae HomeReady and Freddie Mac Home Possible mortgages, require as little as 3% down. Conventional loans are not backed by the government, but follow the down payment guidelines set by the government-sponsored enterprises Fannie Mae and Freddie Mac and can go as low as 3% down for first-time home buyers and 5% for previous owners.
Down payment requirements can also vary by lender and the borrower’s credit history. The minimum down payment for an FHA loan is just 3.5% with a credit score of 580 or higher, for example, but the minimum is 10% with a credit score of 500 to 579.
A Larger Down Payment Has Benefits
Saving money takes time, so a zero or low-down-payment requirement may speed up your ability to buy a home. But making a larger down payment has advantages, which include:
- A better mortgage interest rate.
- Lower closing costs and ongoing fees.
- More equity in your home right off the bat.
- A lower monthly mortgage payment.
A lower down payment makes the loan a bigger risk in the eyes of the lender. Government-backed mortgage programs, such as FHA, VA and USDA loans, reduce the risk by guaranteeing a portion of the loans. If a borrower defaults on one of these loans, the associated government agency will reimburse the lender for what the borrower owes.
But you pay for the guarantee through fees or mortgage insurance, depending on the program.
Conventional mortgages usually require you to pay for private mortgage insurance if you put down less than 20%.
Advice On Choosing Your Down Payment Amount
The optimal down payment amount will depend on your goals and financial situation. A larger down payment will mean a lower monthly mortgage bill, but putting down too much could leave you strapped for cash after you move in.
To help you determine the right down payment amount:
- Use a mortgage calculator to see how the down payment amount affects the monthly mortgage amount.
- Set a budget, and make sure you leave enough cash in hand for home maintenance and emergencies.
- Avoid using all your savings for a down payment. You’ll need cash after you buy a home.
We can help walk you through the available down payment options for your specific scenario and come up with a strategy that fits your overall financial plan. Contact us today to get started!