If you’re in the market to buy a house then you probably have the same question as other homebuyers.
How much is a down payment on a house?
The truth is, it depends.
It depends on the price of the home, your credit rating, which type of loan you choose and more.
We’re going to take a look into mortgage down payments to help answer that question.
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What is a Down Payment?
A down payment is a percentage of the purchase price a borrower must pay up-front to buy a home. The down payment is given to the seller and the bank gives a loan for the rest of the money.
The down payment will be a percentage of the purchase price.
For example, if you buy a $200,000 home and the down payment is 10%, the down payment is $20,000.
Use our home affordability calculator to see how much you will qualify for.
How Much is a Down Payment?
There is no average down payment homebuyers put down because it will depend on the type of mortgage loan you qualify for. Traditionally, borrowers put 20% down and finance the rest.
However, there are many more options that allow homebuyers to buy a house with no or a very low down payment such as, FHA and VA loans.
Today there are low and zero down payment mortgage options.
Down payment requirements for each type of mortgage
- FHA Loans – 3.5% with a 580 score, 10% down with a 500-579 score
- USDA Loans – Zero Downpayment
- VA Loans – Zero Downpayment
- 203k Loans – 3.5% Down
- HomeReady™ Loans – 3% Down
- Conventional Loans – 3%-20% Down
- Conventional 97 Loan – 3% Down
- Jumbo Loans – 15%-30% Down
FHA Loans – 3.5% – 10% Down Payment
The Federal Housing Administration was created in the 1930’s to help encourage homeownership in America. They do not issue the loans, they insure the loans so the lender is reimbursed if the borrower defaults on the loan.
FHA mortgages come with very low down payment requirements making it a popular option among first-time buyers.
An FHA mortgage is also easier to qualify for because of the low FICO score requirements. Your credit score will also determine how much of a downpayment you need.
See if You Qualify for an FHA Loan
VA Loans – No Down Payment
If you’re a Veteran of this country you may qualify for a VA Loan. A VA mortgage is the cheapest type of home loan you can get and that’s not even the best part.
No down payment!
You can get a VA home loan with zero down. Not only that, they don’t require mortgage insurance, which saves the buyer thousands a year.
Check if you’re eligible for a VA loan and get your certificate on the Veterans Affairs website.
USDA Loans – No Down Payment
The U.S. Department of Agriculture started the USDA housing program to help low income families purchase homes in rural areas of the county.
In order to qualify, your household income cannot exceed 115% of the average income in your area. The home must also be located in a USDA eligible location.
There are a few benefits of these loans. For starters, they don’t require a down payment, they provide 100% financing.
And the mortgage insurance rate is much lower than other types of mortgages at just 0.35%.
Conventional Loans – 3% – 20%+
A conventional mortgage is a conforming loan you get from mortgage lenders that is not backed by the Government. Private lenders issue conventional loans and then sell them, usually to Fannie Mae or Freddie Mac.
Conventional loans typically require a down payment ranging between 5%-20%. A great b benefit of using a conventional mortgage loan is that if you put at least 20% down you don’t need PMI.
There is a special loan program called a conventional 97 loan in which you only need 3% down. You need to speak to your lender to see if they offer this program.
Your Down Payment can be a Gift!
Most types of mortgages allow your down payment to be a gift from a relative or friend. You will need a gift letter to give to your lender verifying who gave you the money and that it is indeed a gift, not a loan, and does not need to be repaid.
The lender will allow require at least the last month or two worth of bank statement from the individual gifting the funds.
You can download a sample gift letter for a mortgage here.
Pros and Cons of a Large Down Payment
While there are types of home loans that require little or no money down, there are benefits to putting more money down. Remember, the more you put down the lower your monthly payment will be.
Pros
- No mortgage insurance with loan-to-value ratio (LTV ratio) of 80% or lower
- Lower LTV ratio may get you a lower interest rate
- Your monthly mortgage payment will be cheaper
- Save a lot of money in interest over the course of the loan
- Instant equity
- Lower debt-to-income ratio giving you more favorable loan terms
- Qualify for a more expensive home
Cons
- Less money in your savings account
- Could invest the extra cash instead and earn a return on your investment
- Less liquid cash flow, moving your savings from cash to equity in a home
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Costs other than the Down Payment You need to Remember
There are more up-front costs associated with a mortgage besides just the down payment. There are also recurring costs you should budget for as well. Use our home affordability calculator to see how much you can afford including all expenses.
Closing Costs
Closing costs are fees charged by a mortgage lender for issuing a loan. The average closing costs comes to about 2%-5% of the loan amount.
Most of the time these costs can be rolled into the loan which will increase the amount amount of the loan and the mortgage payments.
Mortgage Insurance
Earlier in this article we detailed mortgage insurance costs. Unless you’re getting a VA loan or put at least 20% down on a conventional loan you’ll have to pay PMI. Annual PMI can cost between 0.35% – 1% of the loan amount.
Property Taxes
Property taxes are paid to your city annually and are a percentage of your assessed property value. The tax rate changes depending on the state and city. Look up the property tax rate in your area here
HOA Fees
If your neighborhood has a homeowners association there will be an annual fee. HOA fees aren’t more than a few hundred dollars per year.
Down Payment and Mortgage Insurance Premiums PMI
If you do not have at least a 20% down payment you will be required to carry mortgage insurance. A private mortgage insurance, or PMI, is insurance protection for the lender in the event a borrower defaults on the loan.
The PMI amount is usually between 0.50% – 1% of the loan amount annually.
For example, a home with a $200,000 mortgage and a PMI rate of 0.50 percent will have an annual insurance premium of $1,000.
A mortgage insurance premium for FHA will be required regardless of how much money you put down. However, the amount of your down payment will affect your MIP rate.
The infographic below shows that if you put less than a 5% down payment your MIP rate will be 0.85%.
If you put a minimum down payment of 5% the rate goes down to 0.80%.
And if you put 10% or more down you only have to carry mortgage insurance for the first 11 years of the loan, instead of the life of the loan.
Down Payment Assistance Programs and Grants
There are several different types of down payment assistance programs and grants available from various Federal and State agencies.
You can check the HUD website for information on programs available in your state. You should also check your local city or county website for a list of first-time home buyer and down payment assistance programs available in your area.
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Randall has over 15 years of experience in the mortgage and credit industries. He spends a chunk of time helping consumers understand their credit, advise them on how to increase their credit, and lending his mortgage expertise to help them find the right type of loan. Randall lives in Dallas, Texas with his two sons.
