Do your eyes start to shine when you hear your realtor talking about conventional loan down payments versus FHA loans, VA loans versus USDA loans?
Of course, different types of loans require different down payment amounts. But for any given borrower, there are usually just a few better mortgage loan options to choose from, each with their own minimum required down payment.
It is not necessary to become a mortgage expert. You just need to know the basics to get an idea of how much of a down payment you need to buy a home.
How much of a down payment is needed when buying a home?
Historically, homebuyers devalue at least 20% to purchase real estate. This protected borrowers from spending more than they could afford and protected banks from high default rates.
But government efforts to raise home ownership rates have led to lower and lower down payments, hitting an all-time low during the mid-2000s housing bubble. Lending became too slow and you know what happened next.
And low down payment loans remain in vogue even as subscriptions have tightened. But just because the loan you’re taking requires a lower down payment doesn’t mean it’s what you really need to buy a home. There is often a difference between the minimum down payment requirements and how much you should save on a down payment.
Minimum down payment requirements
While the 0% down payment is mostly a reminder at this point, there are some special groups that can still avoid down payments altogether. These groups are military veterans and homebuyers in designated rural areas.
Everyone else should plan to cut at least 3% and probably a lot more. How much more depends on many factors, but in particular on your credit score and loan program.
This graph shows the lowest down payment allowed for the mortgage type. Note that these are the lowest rates available, not necessarily the lowest rate you qualify for.
|Mortgage type||Minimum advance|
That’s a lot of alphabet soup and you’ll soon learn all those initialisms. The point is, the lows are really low, but most buyers won’t qualify for them. You should base your personal minimum down payment on specific circumstances.
Minimum you should save for a down payment
Spoiler warning: Most borrowers don’t qualify for VA or USDA loans, however. So it’s probably more than 0%. Between conventional and FHA loans, down payments still vary.
So how do you know how much you will have to set aside on a house? Your credit score and other financial factors play a role, but it all starts with the type of loan you can access.
There is a reason they are called conventional loans. These traditional mortgage programs are what you probably think about when you imagine going to the bank for a loan.
Conventional loans follow rigid lending programs dictated by government-sponsored mortgage giants Fannie Mae and Freddie Mac. But be warned: these loans better serve borrowers with strong credit. And you generally need at least a 620 to qualify.
Strong borrowers can take advantage of programs like Fannie Mae’s HomeReady or Freddie Mac’s Home Possible to shop for as little as 3% less. But borrowers with shaky credit can expect to drop 10%, 20% or even more on conventional loans.
The Federal Housing Administration (FHA) has decided to create an alternative loan program to help first-time buyers with lower incomes or credit scores become homeowners. The step: FHA loans only allow 3.5% less for borrowers with credit scores above 580 and 10% for those with scores between 500 and 579.
This is a winning sell step on the surface, but after the FHA lost so much money to defaults during the Great Recession, it changed the rules. Previously, borrowers could remove mortgage insurance once the loan was paid off below 80% of the home’s value. But the FHA now requires borrowers to continue paying the mortgage insurance premium for the life of the loan.
So while your neighbor with a conventional loan calls his lender after a few years to remove private mortgage insurance and save a hundred dollars a month, you’ll be stuck paying mortgage insurance 20 years from now.
However, if an FHA loan is the only way to get you into your dream home, you can always swallow the mortgage insurance pill for now and potentially refinance later or just pay off your mortgage early, which makes a down payment easier. great.
If you are a veteran who has served in the military, ask the VA home loan loan officers. In addition to the 0% down payment option, these loans, backed by the US Department of Veterans Affairs, generally come with generous interest rates.
Even better, VA loans don’t require private mortgage insurance, even if you have to pay the VA funding fee.
These loans are an employer benefit of military service, so take advantage of them if you can. Just because they only require a 0% down payment doesn’t mean you can’t put in a bigger one if it benefits you.
The US Department of Agriculture seeks to revive rural economies by offering generous terms on USDA loans. But it takes more than the desire for a quiet life to qualify for one. In addition to having to qualify as a borrower (the easy part), the property must be in an approved zone. To verify eligibility, view the USDA Rural Development Program eligibility map.
And because these loans are a form of local subsidy, they often offer better terms than the market. This starts with their popular 0% down payment option. And like FHA loans, they won’t reject you if your credit has dents. But unlike FHA loans, there is no mortgage insurance, even if you have to pay a guarantee fee.
If you and your potential property qualify, you will likely get a better deal on USDA loans than conventional mortgages.
Advantages of a larger down payment
As a general rule, it is better to put more down than less on a house. So no matter what minimum down payment you qualify for, down payment padding can offer these benefits.
1. Lower interest rates and fees
Mortgage lenders rate loans based on risk. The more they perceive the risk of you defaulting, the more they charge.
Putting more money on a home reduces the bank’s risk in several ways. First, it reduces the loan-to-value ratio, so if the worst happens and you default, they’re more likely to get their money back through a short sale or foreclosure. It also means that you have more skins in the game, leading to a greater financial commitment to the property.
Lenders typically also charge lower fees for low-risk loans. This helps you save on closing costs at the time of purchase, not just the monthly payment.
2. Lower payments and interest over the term of the loan
At the risk of stating the obvious, the less you borrow, the less interest you pay over the life of your mortgage loan.
Also, you owe a lower monthly payment. This leaves more money for the other budget categories and prevents you from straining to make the monthly mortgage payment.
You start immediately with even more home equity. Help some homeowners get a better night’s sleep knowing they can always tap into their home equity in an emergency.
3. Avoid private mortgage insurance
If you lower 20% or more to buy with a conventional mortgage, you don’t have to pay for mortgage insurance. This can save you thousands of dollars every year in money serving the bank rather than you.
4. Easier subscription
A higher down payment can make you a low-risk borrower. This can simplify your subscription for faster and easier closing.
5. Stronger negotiating position with sellers
While cash offers carry the most weight with sellers, it helps if you can say, “You can count on my ability to please you because I’m bringing in a huge down payment.” This enables you to negotiate a lower purchase price or at least stand out from other offers.
If you really want to get their attention, you can pay a huge down payment when you sign the sales contract. An earnest money deposit is a type of bona fide deposit. Show that you are serious about buying. If you cancel the contract, the seller may be able to withhold the money under certain circumstances.
Just make sure you get it all back if your funding fails or the home inspection reveals a troll infestation or something.
6. Avoid jumbo loans
A higher down payment could also help you avoid having to take out a jumbo mortgage loan.
These large loans cost more because they exceed (don’t comply with) Fannie Mae and Freddie Mac’s loan amount limits on compliant loans. Expect higher interest rates, higher fees, and more underwriting bureaucracy.
But you can potentially avoid having to take out a jumbo loan with a larger down payment.
So how much should you put down on a house?
If you have strong credit and a lot of cash on hand, cut it down by 20%. You avoid private mortgage insurance, get lower mortgage fees and interest rates, and you should have an easier time underwriting.
But not everyone can swing it. He tries to get you as close as possible, though.
If you barely have enough to buy right now, should you take the plunge or stand by and save more money?
It depends on your long-term goals and whether buying saves you money. In some markets, rent costs more than ownership, even after taking into account repairs and maintenance. In other real estate markets, such as San Francisco, rent is much cheaper.
Buying might make particular sense if you plan to hack your home. I haven’t paid the full price for accommodation in over a decade and I don’t miss it.
More importantly, don’t buy if it would drain your emergency fund and leave you exhausted. Unlike renters, homeowners need to budget for home repairs and maintenance, which means they need more emergency savings. Don’t put yourself on the brink just to own a home.
Homes are the largest assets most people have ever owned and they are expensive. Long before you start looking for real estate, you should start strategizing on how to foot the bill.
If you can find a way to reduce a home by 20%, you will save considerable money and headaches in the long run. It also reduces your risks as a homeowner, both of going upside down with your mortgage and finding yourself unable to pay the mortgage payments.
If a sizable down payment proves unfeasible, you can still reduce your loan costs by increasing your credit score and taking out a conventional mortgage rather than an FHA loan.