Getting a mortgage to buy a house will require a down payment.
The amount of the down payment will largely depend on the price of the home, type of loan, and your credit score.
In this article, we will discuss how down payments work, how much you have to put down on a mortgage, and tips for getting a lower down payment.
What is a Down Payment
A down payment is needed when you get a loan for a house, car, or another asset. It is a portion of the sales price that is due to the lender upfront. A down payment is usually required so the borrower has some skin in the game.
A borrower is less likely to default on a loan if they stand to lose the entire down payment in the process.
The amount of the down payment will vary depending on several factors. If you’re getting an FHA home mortgage for example, you will need a 3.5% down payment. However, if your credit score is below 580 you will have to put down 10% of the sales price of the home.
A down payment is in addition to closing costs, it is not included.
Example: You are buying a house with a $200,000 purchase price using an FHA home loan, you will need 3.5% down, or $7,000.
Down Payment by Loan Type
- FHA Loan: 3.5% with 580+ FICO score, 10% with a score below 580
- Conventional loan: 5%-20% (20% required to avoid mortgage insurance)
- VA loan: 0%
- USDA loan: 0%
- FHA 203k loan: 3.5%
- Conventional 97: 3%
What Can Affect the Amount of a Down Payment on a Loan
Your credit rating not only determines the interest rate you will receive on a loan, but it can also affect the amount of the down payment. A person with a lower credit score is seen as more risky to lenders, so they may require a larger down payment to help offset that risk.
FHA loans are the only type of mortgage loan that has a set down payment that varies depending on a borrowers credit score. Before you apply for a mortgage take some steps to improve your credit score.
Your debt-to-income ratio (DTI ratio) is the amount of your monthly income goes towards debt such as auto loans, credit cards, etc. The ideal DTI ratio for a mortgage is 36%, but lenders allow up to 43% in most cases. If your DTI ratio is above 43%, you will need a larger down payment to qualify for a mortgage.
The mortgage term you choose such as a 15-year or 30-year mortgage loan will have an effect on the amount of down payment you’ll need. Since shorter loan terms have higher monthly payments, your DTI ratio is impacted and could possibly lead to a borrower needing to put more money down.
Every type of mortgage loan requires mortgage insurance, except VA loans. You can avoid paying PMI on a conventional loan if you have a 20 percent down payment. FHA loans require PMI regardless of the amount of the down payment. PMI is about 1% of the loan amount annually, if you can it’s a good idea to put 20% down to avoid it.
Pros and Cons of Using a Larger Down Payment
- No private mortgage insurance (PMI) with at least 20% down
- Lower monthly mortgage payment
- Pay less interest over the life of the loan
- Lower mortgage rates
- Less money in savings
- First time home buyers will have to wait longer to buy while saving for a large down payment
- Less money you can invest and get compound interest
The Average Down Payment
The average down payment is just over 6%. While many people do put 20% down there are more and more home buyers using an FHA loan to purchase a home. FHA loans only require a 3.5% down payment. VA loans are another people mortgage type for Veterans which is available with no down payment at all.
Down Payment FAQ
How much should a first-time home buyer put down on a house?
First-time buyers often less to put down on a house than repeat buyers. This is one reason FHA loans are so popular among first-time homebuyers, they require just a 3.5% down payment.
Do I need to put 20 percent down to buy a home?
No. While you can avoid mortgage insurance with a 20% down payment with a conventional loan, there are loans such as FHA and Conventional 97 loans that require 3.5% and 3% down.
Can you avoid PMI without 20% down?
There are some creative ways you can avoid PMI, one of which is a piggy back loan. An 80/10/10 piggyback mortgage is where you finance 80% of the purchase price, put 10% down, and get a separate loan for 10%.
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