How Much Do You Need For A Down Payment?
Home purchases are oftentimes the most significant and expensive financial transactions that many people make in their lifetime. It’s unsurprising then that saving up for a down payment remains one of the most challenging obstacles for potential homeowners. While a 20% down payment is considered ideal by most lenders, actually being able to put down 20% is not as common as you might think, and there are other alternatives that are acceptable for purchasing a home.
Usually it is required by lenders to pay 3% to 20% of your home’s purchase price in cash upfront to get a conventional mortgage loan (fixed-rate for 30 years), but there are several exceptions. If you are eligible, you could qualify for a zero-down payment with a VA loan or USDA loan program.
Down Payments 101
A down payment is usually measured as a percentage of the home’s purchase price that is paid upfront in cash to purchase a home. This amount, combined with a home loan, totals the entire purchase price. It is your down payment amount in addition to your credit history, credit score, debts, and income that determines which loans you can qualify for. The higher your down payment is, the lower your interest rate will be, and your monthly mortgage payments will be lower as well.
Why is 20% Ideal?
There are several benefits available for borrowers who manage to put down 20%. Private mortgage insurance isn’t required by lenders if the borrower puts down 20% or more, and you can get a lower interest rate on your loan (which helps you save thousands of dollars over time). You will also get more equity in your home faster, and your mortgage payment each month will be smaller. Larger down payments can also get a seller’s attention in a competitive real estate market and be the reason they choose your offer over another one.
While 20% is not required, it is beneficial to the borrower and as a result many buyers will put down 20% or more. This is more popular in the West and Northeast (where 47% and 52% put down at least 20%), because markets in those regions are oftentimes more competitive.
Struggles Sourcing Down Payments
While some buyers are able to put down more than 20% for their home purchase, this doesn’t mean that saving up that amount was quick and easy. The down payment is often the primary reason renters haven’t transitioned to homeownership, and almost a third of buyers (29%) mention how challenging it is to save up for a down payment.
Some save up the old-fashioned way by putting a little bit aside in savings each month. Others get creative and receive gift funds from friends or family, sell investments or stock, use some of their retirement funds, or use money leftover from a previous home’s sale.
Since repeat buyers can include some of the money from the sale of their previous home as part of their down payment, they are more likely to have larger down payment amounts than first-time home buyers who average between 3% and 9%.
Less Than 20% Down Loans
Getting a zero-down loan is a challenge since there is strict criteria that has to be met in order to qualify, but there are many different loan programs that have low down payment requirements, and these are easier to obtain.
A Federal Housing Administration loan (also referred to as an FHA loan) is one of the most common low down payment loan options, allowing a 3.5% down payment. The main downside of this program however is the required mortgage insurance premiums. This protects the lender in case you default on your mortgage payments.
There are also two Fannie Mae loans, the HomeReady and Conventional 97 mortgages, which allow a 3% down payment. Conventional 97 mortgages help home buyers with good credit who wouldn’t have the resources to make a large down payment. HomeReady mortgages are designed to help low-income to moderate-income individuals or families in low-income areas or regions impacted by disasters.
In addition to these, there are also local and state assistance programs that will help you purchase a home with a lower down payment. There are also several towns with incentives offered so that people will move there. These include forgiving student loan debts and providing free land to build on. Some programs won’t be able to cover a down payment or you, but they can help you save in different areas so that you can put the funds toward your down payment instead.