A down payment is a substantial initial payment made when purchasing items like a home, serving as your contribution towards the purchase price, while the rest is financed through a loan. Typically, it is represented as a percentage of the property’s cost. For example, a 10% down payment on a $350,000 home amounts to $35,000.
Deciphering the Down Payment
When you apply for a mortgage to buy a house, the down payment signifies your initial stake in the property. The mortgage lender provides the remaining funds required to complete the purchase. Almost all mortgages demand a down payment, but some government-backed loans may not require one.
Do You Need to Put 20% Down on a House?
It’s a common misconception that you must make a 20% down payment to purchase a house, primarily associated with the requirement for mortgage insurance on conventional loans. However, this is not a universal rule. In fact, in 2021, first-time homebuyers typically made a 7% down payment, while repeat buyers put down an average of 17%.
Minimum Down Payment Requirements
The minimum down payment required varies based on the type of mortgage you intend to apply for:
0% Down Payment Mortgages
- VA Loans: These mortgages, guaranteed by the U.S. Department of Veterans Affairs, generally do not necessitate a down payment. They are exclusively available to current and veteran military service members and eligible surviving spouses.
- USDA Loans: Backed by the U.S. Department of Agriculture’s Rural Development program, USDA loans also have a no down payment requirement. They cater to rural and suburban homebuyers who meet specific income limits and criteria.
As Low as 3% Down Payment Mortgages
- Conventional Mortgages (HomeReady and Home Possible): These mortgages require as little as 3% down, provided you meet specific income limits. Conventional loans are not government-backed but adhere to the guidelines set by government-sponsored enterprises, Fannie Mae and Freddie Mac.
As Low as 3.5% Down Payment Mortgages
- FHA Loans: These are backed by the Federal Housing Administration and demand only a 3.5% down payment if your credit score is at least 580. For credit scores between 500 and 579, FHA loans require a 10% down payment.
As Low as 10% Down Payment Mortgages
- Jumbo Loans: These loans exceed the Federal Housing Finance Agency’s conforming loan limits. Due to the increased risk associated with these substantial loans, lenders often ask for higher down payments.
Advantages of a Larger Down Payment
While low or no-down-payment loans have their advantages, making a substantial down payment offers several benefits, including:
- Better Mortgage Interest Rate: Lenders are more likely to offer a lower interest rate when you make a larger down payment. Reduced borrowing means less risk for lenders, translating into more favorable terms.
- Immediate Equity: A larger down payment means more equity in your home from the beginning, enhancing your overall wealth.
- Lower Monthly Mortgage Payment: With a smaller loan amount, you’ll pay less interest over the life of the mortgage, leading to lower monthly payments.
- Reduced Fees: Government-backed low or no-down-payment programs may include fees or mortgage insurance to mitigate risks for lenders.
How Much Should You Put Down on a House?
The right down payment amount depends on your goals and financial situation. While a larger down payment has several advantages, putting down too much can strain your finances post-purchase. Conventional mortgages often require private mortgage insurance if you put down less than 20%, which can be canceled after achieving 20% equity in your home.
Other Considerations for Your Down Payment
Remember that your mortgage payment is just one aspect of your overall budget. Here are other factors to contemplate when deciding the size of your down payment:
- Maintain Savings: Avoid depleting your savings entirely for the down payment. You should ensure you have an emergency fund and avoid becoming “house poor.”
- Consider Closing Costs: Be prepared to cover closing costs, which typically range from 2% to 6% of the home’s purchase price.
- Ongoing Homeownership Costs: Budget for home maintenance, repairs, and unexpected emergencies, even if you’re buying a move-in-ready home.
- Shop Around: Conduct thorough research, compare mortgage rates from multiple lenders, and explore down payment assistance options, particularly if you’re a first-time homebuyer.
By considering these factors and choosing the right down payment for your situation, you can confidently embark on your journey to homeownership.