How much should a house down payment be?

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You might be wondering how much to put down on your mortgage loan, whether you’re a seasoned homeowner searching for a new place to live or if this is your first time buying a property.

While many financial advisers recommend a 20% down payment, many would-be homeowners find it to be an unattainable goal. Additionally, depending on the kind of mortgage loan you select, there may be differences in the down payment requirements and the impact of your down payment. If you’re just starting, you might want to look at our guide on current mortgage rates, which breaks down the various mortgage kinds.

Here are some things to consider as you get ready to purchase a home, including how much down payment you should save and how much will work best for your budget.

Is a down payment of 20% required?

The Federal Reserve Bank of St. Louis’s (FRED) Q1 2024 figures show that the median price of a home sold is $420,800. This means that to make a 20% down payment, you would need to save up around $85,000, which does not include the closing expenses associated with your loan.

The main justification given by financial advisors for their 20% down payment recommendation is that conventional mortgage lenders usually demand private mortgage insurance (PMI) for loans with smaller down payments. In the unlikely event that you miss payments, PMI safeguards lenders. Every $100,000 borrowed usually costs between $30 and $70 a month.

In addition to lowering your monthly payment, a bigger down payment may also enable you to get a cheaper interest rate.

Nevertheless, with government-backed loan programs, mortgage insurance and other related expenses are not dependent on your down payment amount, and the minimum down payment requirements are generally significantly lower than 20%.

Minimum down payment requirements

It may be discouraging to first-time homebuyers to learn that saving for a down payment on the house of their dreams could take years. Thankfully, some financing programs have less of a down payment than others, increasing the number of people who can become homeowners.

It’s crucial to remember that first-time homebuyers are primarily eligible for conventional loans with a 3% minimum down payment. It is usually 5% if you have owned a property within the last three years.

And remember that if you apply for an FHA home loan and your credit score is less than 580 (but not 500), you will also need to put down a minimum of 10% of the total amount.

What can you use as a down payment?

To reduce risk, lenders have tight guidelines regarding the money you can use for your down payment. For instance, the proceeds from a credit card cash advance or a personal loan are not eligible for use. Nevertheless, the following might be used for your down payment:

  • Personal savings: A down payment can be made with whatever funds you have accumulated over time in an investment or savings account. You could even be able to take out up to $10,000 from an IRA without paying an early withdrawal penalty if you’re a first-time home buyer. However, you will still have to pay income taxes on the withdrawal.
  • Sales proceeds from your current home: It may be possible to schedule the sale of your current home such that the proceeds are applied to the down payment on your new home.
  • Home equity: If you want to keep your current home, you can use your equity by taking out a cash-out refinance loan, home equity line of credit, or home equity loan to use as a down payment for a second property.
  • Friends and family: Generally, lenders will take money that has been given or lent by friends or family. This includes bequests left by recently departed family members.
  • Piggyback loan: You can use a piggyback loan, which is a second mortgage loan, to raise your down payment amount. To fulfill the 20% criteria to avoid PMI, for instance, you may borrow 10% through a piggyback loan and contribute 10% in cash. Your primary mortgage may have a lower interest rate than the piggyback loan.

No matter how you intend to pay for your down payment, it’s critical that you accurately record the source of the money you utilize. Usually, bank statements and other supporting evidence are requested by lenders to make sure the funds are qualified.

Is it possible to get a no-down payment mortgage?

It is feasible to purchase a home without a down payment if you are having financial difficulties. If you are eligible, here’s how to obtain a mortgage for a house with no down payment:

  • VA loans. You might be qualified for a VA loan, which waives the need for a down payment if you are a member of the US military.
  • USDA loans: USDA loans do not need a down payment to be authorized, just like VA loans. If you have a low to moderate income and are purchasing a property in a rural location that qualifies, you might be eligible for a USDA loan.
  • Conventional loans: Although it’s uncommon, some traditional lenders give first-time homebuyers with lesser incomes 0% down payment mortgages.

Sarah Alvarez, vice president of mortgage banking at William Raveis Mortgage, states that in certain circumstances, this kind of product is just what someone needs to start living their version of the American dream.

How to get help with a down payment

To help you achieve the minimal requirement for your loan, several lenders, community organizations, and government agencies provide down payment assistance programs if this is your first time buying a home. These programs occasionally offer help with closing costs as well.

There are several ways to get help with a down payment: grants, low-interest loans, deferred payments, forgiven loans, and special savings accounts that match your contributions.

Consult a local mortgage expert if you’re a first-time home buyer with a modest salary to find out about your choices for possible aid. You could also be able to find programs for which you can qualify with the assistance of a housing counseling organization accredited by the U.S. Department of Housing and Urban Development (HUD).

How much should you put down on a home?

Since every circumstance is unique, there isn’t a single response to this query that applies to all potential homeowners. It’s critical to assess your financial status, aspirations, and the advantages and disadvantages of making a larger vs a smaller down payment to decide how much down payment is appropriate for a home.

Pros and cons of a larger down payment

It may take longer to save up enough money to reach your down payment objective, even while a bigger down payment can lower your interest rate and monthly payment as well as perhaps remove PMI on a traditional loan.

Additionally, if you tie up more money for your house, you have less money saved up for other expenses.

“It’s wise to make sure you have reserves because, at the end of the day, you also have to think about moving, decorating, landscaping, and other things that come along with home ownership,” advises Alvarez of William Raveis Mortgage.

Pros and cons of a smaller down payment

Conversely, a smaller down payment can enable you to move into a house faster and free up more funds for other goals and needs related to money. A lower down payment, nevertheless, can end up costing more in the long term.

Furthermore, you run the risk of having more debt than your house is worth if local real estate values decline. If you wish to sell your house soon, this may reduce your possibilities.

The takeaway

When buying a home, your down payment has a big influence on how much you have to loan. But if you’re asking for a government-backed loan rather than a traditional mortgage, you don’t have to adhere to the widely touted 20% down payment criterion.

Putting down a larger or smaller down payment on a house purchase has benefits and drawbacks that should be carefully considered to decide which option is best for you. But at the very least, we believe that the fact that a down payment can be far smaller and that homeownership is more accessible than it may have initially appeared will reassure first-time homebuyers who may have felt that 20% was unachievable or would strain their finances.

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