The largest obstacle for potential home buyers can be finding the money for a down payment on a home. But how much of a deposit do you require? Usually, that depends on the loan type, your lender, and your priorities.
A down payment is the cash you pay upfront to purchase a large asset, such as a house. A loan is used to pay back the rest of the purchase price over time. Usually, the down payment is shown as a percentage of the total cost. A 10% down payment would total $35,000 for a property worth $350,000.
When you apply for a mortgage to buy a property, the down payment is your contribution toward the purchase and represents your initial ownership stake in the house. The mortgage lender contributes the last amount needed to buy the home.
The majority of home loans have down payments required by the lender. However, some federally guaranteed loan types could not call for down payments.
While it's true that many lenders utilize a 20% down payment as the cutoff point for mandating mortgage insurance on conventional loans, this is not the actual requirement. A 20% down payment is not required to purchase a home.
The usual first-time home buyer down payment in 2021 was 7%, according to the National Association of Realtors. For repeat buyers, the usual down payment was 17%.
You might be able to achieve your goal of homeownership more quickly if you put less money down. A larger down payment, however, lowers the principle (and total lifetime interest payments), which can result in overall savings for you. Consider both sides before deciding what is best for you.
Depending on the type of mortgage you intend to apply for, different minimum down payments are needed for different types of homes:
Home Loans With 0% Down Payment
Backed by the U.S. Department Of Veterans Affairs (VA), VA Home Loans don't usually call for a down payment. These kinds of loans are available to qualifying surviving spouses and active-duty military personnel. US-backed USDA loans are available. The Rural Development Program of the Department of Agriculture does not additionally demand a down payment. Homebuyers in rural and suburban areas who meet the program's income restrictions and other standards are eligible for USDA loans.
3% Down Payment Mortgages
As long as income requirements are met, some traditional mortgages, such as HomeReady and Home Possible may only ask for a down payment as low as 3%. Conventional loans are not government-backed, but they adhere to the down payment criteria established by the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.
3.5% Down Payment Mortgages
If you have a credit score of at least 580, FHA loans, which are backed by the Federal Housing Administration, demand as little as 3.5% down. FHA loans require a 10% down payment if your credit score is between 500 and 579.
10% Down Payment Mortgages
Jumbo loans are home loans that exceed the conforming loan restrictions set by the Federal Housing Finance Agency. Because these large loans cannot be guaranteed by the GSEs, lenders typically need greater down payments to offset some of the risk.
The guarantee is paid for through fees or mortgage insurance, depending on the scheme, with low- or no-down-payment loans.
It takes time to save enough money for a sizable down payment, so a zero- or low-down-payment requirement may expedite your ability to buy a property. However, making a bigger down payment offers some advantages, including:
A lower interest rate on a mortgage. If you make a higher down payment, lenders may reduce your interest rate by a few fractions of a percentage point. Lenders are less risky when you borrow less of the home's value, and they tend to reward this with better terms.
More equity in your property. The value of your property less the amount owed on your mortgage is your home equity. In other words, it is the extent to which your property is considered an asset rather than a liability. More equity equates to more wealth.
A smaller mortgage payment each month. Borrowing less of your home's value reduces your principle, which means you'll pay less interest throughout the loan's term.
Lower initial and ongoing costs. Government-backed mortgage programs with low or no down payment minimize lenders' risk by insuring a portion of the loans. If a borrower fails on one of these loans, the lender will be reimbursed by the linked government agency. To help offset some of the costs, these loans may include one-time fees, such as the VA funding fee, or recurring fees, such as FHA mortgage insurance.
The appropriate down payment for you is determined by your goals and financial position. While a bigger down payment has several advantages, putting down too much may leave you short on cash once you move in.
If you put down less than 20% on a conventional mortgage, you will normally be required to pay for private mortgage insurance. Once you begin making mortgage payments, you can request that PMI be removed once you have more than 20% equity in your house.
Experiment with several scenarios to better understand how changing the quantity of your down payment affects other expenditures.
Your mortgage payment is only one component of your total home budget. With that in mind, consider the following variables when deciding on the size of your down payment:
Maintain some funds in the bank. Avoid utilizing all of your savings for a down payment. You could become "house poor," spending too much of your salary on mortgage payments or emptying your emergency fund.
Remember to factor in closing costs. It's also critical to have enough money on hand to meet closing expenses, which are typically 2-6% of the home's buying price.
Make a budget for the ongoing costs of homeownership. Even if you're buying a move-in-ready house, it's a good idea to budget for home maintenance and repairs, as well as unforeseen emergencies. Overall, you want to ensure that your down payment allows you to cover all of the expenditures of purchasing a home — as well as outfitting it once you've moved in.
Look around. Do your homework and compare mortgage rates from three to five different lenders. Don't forget to look into lender programs and down payment help possibilities, especially if you're a first-time home buyer.
These are just some tips when preparing for your dream home's down payment. If you have more strategies on how to do this, please feel free to share them below.