One of the great mysteries for first-time homebuyers is their down payment amount. For years, there has been a prevailing myth that you need to have 20% down in order to purchase a home. It’s not true!
In fact, the average down payment on a home for a first-time homebuyer is around 6% of the purchase price. For buyers who have bought before, it moves up to around 12%. Both figures are a far cry from 20%.
Keep in mind that the minimum down payment depends on the type of loan, the lender you choose and your current finances.
Let’s look at some of the most popular loan programs and their respective down payment requirements. One of the loan programs covered should be an excellent option before making an offer on a home.
What are down payments?
The down payment is the amount of money you pay out of pocket when making a home purchase. You get a mortgage from a lender to pay the rest of the home’s purchase price over a specific amount of years. This is known as the loan term.
Down payments are often referred to as a specific percentage of the purchase price. For example, a 10% down payment on a $500,000 home would be $50,000.
When you purchase a home, the amount of money you put down will become your equity on the day of purchase. The mortgage lender you choose to work with will provide you the rest of the money to buy.
For most mortgage programs, you will need to have a down payment. However, there are a couple that do not require a down payment, including a VA loan and a USDA mortgage.
The 20% mortgage myth
For years, many people have assumed that you need to have 20% down to buy a home. The confusion is probably due to the fact that if you put down less, you will have to pay private mortgage insurance.
Private mortgage insurance or PMI is a fee that helps protect lenders in the event a borrow defaults on their mortgage. You can get rid of the private mortgage insurance payment when your equity reaches 20%.
Low and no down payment mortgage programs
Here is a review of the down payment requirements for some of the most popular mortgage programs.
No down payment loans
The two zero down payment mortgage programs are a VA loan and a USDA loan. VA mortgages are for current and former military service members and their eligible spouses. These loans are guaranteed by the U.S Department of Veterans Affairs.
USDA loans are backed by the U.S Department of Agriculture. A USDA mortgage can only be used on the purchase of a rural property, which is generally considered under a population of 35,000. You must also qualify for the program’s income limits.
A qualified mortgage broker or lender will be able to guide you on both of these lending programs.
Conventional 3% down mortgages
There are two popular 3% down conventional mortgage programs. They are known as HomeReady and Home Possible. These conventional loan programs are not backed by the Federal Government, but rather, follow the guidelines set by Freddie Mac and Fannie Mae.
FHA loans are one of the most popular mortgage programs due to their loan down payment requirement of 3.5%. They also have some of the most lenient credit scoring requirements. These mortgages are backed by the Federal Housing Administration.
If you have a credit score of 580 or more you will be able to put down 3.5%. If your credit score is between 500 – 579, an FHA mortgage will require a 10% down payment. However, some lenders may not do the loan when the credit score falls below 580.
Drawbacks of a lower down payment
- When real estate markets favor sellers, low down payments are not looked on favorably due to potential appraisal issues in bidding wars. Quite often, low down payment borrowers cannot make up appraisal gaps.
- Higher down payments usually get the best interest rates from lenders.
- A higher down payment will provide a lower monthly mortgage payment.
- You will have less equity in your home with a low or no down payment.
What to put down on a house
The amount of money you put down on a house depends on your financial circumstances. Do what is best for you. Always think about having an emergency fund. Murphy’s Law can (and will) happen when you least expect it.
Bill Gassett is a nationally recognized real estate leader who has been helping people buy and sell MetroWest Massachusetts real estate for the past 35 years. Bill is the owner and founder of Maximum Real Estate Exposure. For the past decade, he has been one of the top RE/MAX REALTORS® in New England.