How Much Down Payment Do You Need to Buy a House

 

When buying a house, one of the most common questions is: “What down payment do I need to buy a house?” The answer isn’t simple. It depends on your finances and the types of loans you qualify for. The good news is, you may not need to put down as large of a payment as you think! Here’s the low-down on down payments.

FHA Loans

Most homebuyers who qualify for a lower down payment will fall into this category. The Federal Housing Administration backs FHA Loans. The FHA itself does not lend out money for this type of mortgage. You have to go to an FHA-approved mortgage lender, which could be a bank, credit union, or some other kind of financial institution.

Because these loans are meant to help low- or moderate-income earners afford housing, the underwriting standards are flexible and they require lower down payments. The minimum down payment for FHA loans is 3.5%, though you can put down more if you are able. This makes these loans a great option if you are a first-time homebuyer with limited career experience and credit history.

VA Loans

If you’re on active duty, a veteran, or the spouse of someone who was killed in the line of duty, you may be able to obtain a home loan backed by the Department of Veterans Affairs. VA loans are unique because they do not always require the borrower to put any money down. The only reason you might be required to make a down payment is if the home’s sale price is higher than the appraised value.

In addition to no down payment, you can expect to get more favorable terms and interest rates. You’ll have fewer closing costs and you won’t even need private mortgage insurance (PMI)! You can use the loan to do a number of things including purchasing a single-family home of up to four units, buy and improve a home, or even build a brand-new home.

USDA Loans

The U.S. Department of Agriculture, specifically its Rural Development Program, backs these loans. These loans exist to improve local economies in rural areas. Because of this, a USDA loan is the other type of loan that may allow you to put zero down when buying a home.

You will usually need a FICO score of at least 640 to qualify for a USDA loan, although this requirement can vary based on the lender. You’ll need to prove that you have a steady income with tax returns. Plus, you’ll likely need a debt-to-income ratio of 41% or less. The borrower will have to meet certain requirements, and the home must be in a USDA-approved rural area.

Unlike VA loans, you’ll still have to pay closing costs with this type of mortgage. On the plus side, you will usually be able to enjoy mortgage rates that are lower than FHA loans and conventional lows. But the lower your debt and the higher your credit, the better rates you can expect!

Conventional Loans

Lastly, we have conventional loans which are what most people think of when they are shopping around for a mortgage. Down payment requirements will vary widely from one loan option to the next, as will the other loan terms. If you don’t qualify for any of the above types of mortgages, you should be able to get a conventional loan.

Note that “conventional mortgage” is still just an umbrella term for several different types of home loans. For example, Fannie Mae HomeReady loans will allow you to put just 3% down. Other conventional loans will require 5% down if you pay PMI or 20% down if you want to avoid paying for mortgage insurance altogether. A piggyback loan will require you to put 10% down. As you can see, there is a wide variation. Many of these loans require higher down payments because the government does not back them. It makes them inherently riskier for the lender.

Good credit will help you with your down payment for a conventional mortgage. If you have a FICO score of at least 620, lenders are often more flexible with allowing you to make a smaller down payment because they know they are taking on less risk. Ideally, you should have a DTI of 50% or less to qualify for a conventional loan.

Frequently Asked Questions About Down Payment on a House

What is a down payment?

A down payment is an upfront payment made when purchasing a home. This initial payment represents a percentage of the total purchase price, with the remaining balance typically financed through a mortgage loan type. The down payment reduces the amount of money borrowed, lowering the lender’s risk and potentially resulting in more favorable loan terms for the buyer.

What’s the average down payment on a house?

The average down payment on a house varies, but traditionally, many buyers aim for 20% of the home’s purchase price. However, data from the National Association of Realtors (NAR) indicates that the average down payment for first-time homebuyers is around 6%, while repeat buyers tend to put down about 13%. Various loan programs, such as FHA loans, may allow for down payments as low as 3.5%.

Is it worth putting a large down payment?

Putting a large down payment on a house can be worth it for several reasons:

1. Lower Monthly Mortgage Payments: A larger down payment reduces the loan amount, leading to lower monthly mortgage payments.
2. Better Interest Rates: Lenders often give more favorable interest rates to buyers (first-time home buyers or not) who can make larger down payments, as it reduces their risk.
3. Avoiding PMI: Buyers who make a down payment of 20% or more can avoid paying private mortgage insurance (PMI). Down payments of less than 20% typically require PMI.
4. Instant Equity: A larger down payment means more immediate equity in the home, which can be beneficial if the property value fluctuates.

What credit score is needed to buy a house?

The credit score needed to buy a house can vary depending on the type of mortgage and the lender’s requirements:

• Conventional Loans: Generally, a minimum credit score of 620 is required.
• FHA Loans: These loans are designed for first-time buyers and those with lower credit scores. A score of 580 or higher is typically needed to qualify with a 3.5% down payment. A score as low as 500 may be acceptable with a 10% down payment.
• VA Loans: These are available to veterans and active military members. They often require a minimum credit score of 620, though some lenders may allow lower scores.
• USDA Loans: For rural and suburban homebuyers, a minimum score of 640 is often required.

Is it a good idea to buy a house with no money down?

Buying a house with no money can be advantageous in certain situations but also comes with potential drawbacks.

Advantages

• Accessibility: Allows buyers who may not have significant savings to purchase a home.
• Liquidity: Keeps more cash available for emergencies or other investments.

Disadvantages

• Higher Monthly Payments: With no down payment, the loan amount is higher, resulting in larger monthly payments.
• PMI: Buyers are usually required to pay for private mortgage insurance, adding to monthly costs.
• Higher Interest Rates: Lenders may charge higher interest rates due to the increased risk of no down payment.
• Negative Equity Risk: In market downturns, buyers who put no money down may owe more on their mortgage than the home’s value.

For those considering no-down-payment options, VA and USDA loans can be viable choices. They are designed to help specific groups of buyers without requiring a down payment.

Do I get down payment assistance if I purchase a primary residence?

Yes, several down payment assistance programs are available if you are buying a primary residence. These programs vary by state and locality. However, they are designed to help first-time home buyers, low- to moderate-income buyers, and those purchasing in certain housing markets. Some of them are:

• CalHFA MyHome Assistance Program – California: Offers a deferred-payment junior loan of up to 3.5% of the purchase price or appraised value, whichever is less, to help with down payment or closing costs.

• Florida Housing’s First-Time Homebuyer Program – Florida: Offers down payment assistance in the form of a second mortgage, up to $7,500, with 0% interest and deferred payments.

• Texas State Affordable Housing Corporation (TSAHC) – Texas: Offers down payment assistance grants up to 5% of the loan amount for eligible homebuyers.

• HomeFirst Down Payment Assistance Program – New York: Provides up to $100,000 in down payment and closing cost assistance for eligible first-time homebuyers in New York City.

• Atlanta Housing Authority Down Payment Assistance Program—Georgia: This program provides up to $20,000 in down payment assistance for eligible homebuyers.

What’s the down payment difference between residential properties and investment properties?

The down payment requirements for residential properties versus investment properties differ significantly. For residential properties, particularly for first-time homebuyers using conventional loans, the down payment can be as low as 3-5%. FHA loans may require as little as 3.5%.

In contrast, investment properties generally require a much higher down payment, typically around 20-25%. This higher requirement reflects the increased risk that lenders associate with investment real estate. As it is not owner-occupied, it is perceived as more likely to default.

The stricter upfront cost requirements for investment properties ensure that the borrower has significant equity in the property, reducing the lender’s risk.

How much is the down payment for a $400K home?

The down payment for a $400,000 house varies significantly depending on the type of loan and the lender’s requirements. The minimum down payment for conventional loans can be as low as 3%, amounting to $12,000.

Alternatively, a more common requirement is a 5% down payment, usually $20,000. First-time homebuyers often utilize FHA loans, which require a 3.5% down payment of $14,000 for a $400,000 home. These lower down payment options make homeownership more accessible to buyers who may not have substantial savings.

However, to avoid PMI and secure better loan terms, many buyers aim for a 20% down payment of $80,000 on a $400,000 house. This higher down payment reduces the loan amount and monthly payments while potentially securing a lower interest rate.

For high-value homes or those in competitive real estate markets where jumbo loans are necessary, the required down payment might be higher. Its often around 20-25%, equating to $80,000 to $100,000. The exact amount depends on various factors, including the lender’s guidelines and the borrower’s financial profile.

Can I use my retirement savings for a down payment?

There are alternative ways to afford a down payment rather than just saving or using gift money. Borrowing from your 401k or other retirement sources comes with risks. Discuss these options with your financial advisor.

Final Thoughts

Keep in mind that while some loans require lower down payments than others, that doesn’t necessarily mean you should make a low down payment. You will usually benefit if you can afford a higher down payment. You may be able to forgo PMI, qualify for a better mortgage rate, get better terms, and/or qualify for lower mortgage payments.

Note that the lender you are using and your credit affects how much down payment you are expected to make. For example, while FHA loans require a minimum down payment of 3.5%, you will be expected to make a higher down payment of 10% or more if your credit score is below 600. Know that if you have exceptional credit, you can likely get away with a lower down payment on a house.

On average, people put somewhere between 6% and 12% down when purchasing a home. But the right down payment is still a personal decision. You can play with a down payment calculator to help you determine what’s best for your situation.