How Much Down Payment Do You Need to Buy a Home?

What is a Down Payment?

The down payment is the money you give to the home’s seller. The rest of the payment to the seller comes from your mortgage. Down payments are expressed as percentages. A down payment of at least 20 percent lets you avoid mortgage insurance. The money for a down payment can come from your own savings account, the proceeds you get when you sell a house, or gifts and grants from your family, employers and/or non profits.

When you make a down payment, you risk losing that money if you can’t make the house payments and lose your home to foreclosure. This gives you an incentive to make your mortgage payments. This is why the lender requires a down payment. A lower down payment makes you a bigger risk in the eyes of the lender.

How much do I need to put down on a Home

Traditionally most lenders were looking for 20% down payments. That’s $70,000 on a $350,000 home. With 20% down, you’ll have a better chance of getting approved for a loan. And you’ll receive a better mortgage interest rate, lower upfront fees, lower ongoing fees, more equity in your home and a lower monthly payment. However, the down payment is not the only out of pocket costs you have to deal with. There are closing costs and earnest money to consider as well.

Nowadays, most mortgage lenders only require a down payment of at least 3 percent of the Purchase Price. FHA loans require a down payment of at least 3.5 percent. Depending on your credit history, the type of home and your reason for buying, the minimum down payment may be 5 percent, 10 percent, 20 percent or more.

Times have changed. According to the  National Association of Realtors, the median down payment for a first time home buyer has been 6%. It is higher for those buying their second or third homes. The average repeat home buyer puts 14% down, a huge drop from an average of 23%  back in 1989.

The lowering of the average down payment is in part because real estate prices have risen far faster than incomes. Paying less than 20% can free up funds for investing and retirement savings.

A smaller down payment means that you have to pay private mortgage insurance (PMI) until you work your way up to having 20% equity. There is also an option that lets the lender pay the mortgage insurance however the rates are higher than with mortgage insurance. 

What are some lower Down Payment Options?

Fannie Mae and Freddie Mac have 3% down payments on home loans. And if you’re an active or retired service member, or live in a rural area, you may have access to zero down payment programs through the Department of Veterans Affairs or the U.S Department of Agriculture’s Rural Development program. It’s always a good idea to ask a lender about down payment options when you’re shopping for a mortgage.

Some of the programs don’t require mortgage insurance, but will charge an upfront guarantee fee or funding fee.Whatever you call it, a fee is a fee. And as a higher risk, you’ll likely pay a higher interest rate for the life of the loan in addition to the other fees.

Lenders are required to disclose all fees and it’s always a good idea to shop around with multiple mortgage providers to get your best deal. Plus, the more you explore your options, the more you’ll learn about the process. Taking time to compare the fees from different lenders can save you thousands of dollars over the long haul.