What is a down payment? How will you decide the minimum down payments on the mortgage? Do I need to pay a down payment even after applying for a mortgage to buy a house? All these questions might intrigue you when you go to buy a house.
The down payment is the upfront cash you give to take an initial ownership stake in the home. It is an essential factor in buying a house. The minimum down payments for a house determine your loan amount and mortgage interest rate that you pay over the life of the loan. To buy a home, you can pay a minimum down payment upfront and comfortably afford and take a mortgage for the balance.
The minimum down payment for a house commonly ranges between 20% to 30% of the purchasing price. Although the down payment depends on the type of loan you’re applying for and your financial situation, paying at least 10% is recommended as an initial payment.
What is the down payment to buy a house?
The minimum down payment is based on the guidelines of government-sponsored companies like Fannie Mae and Freddie Mac. The mortgage companies expect a 20% minimum down payment from a home buyer. However, if you go for a smaller down payment of 5% to 10%, you have to pay the monthly Private Mortgage Insurance (PMI) fee. The mortgage then will be more expensive for you. However, you can buy a home with zero down payment if you meet the specific restrictions of a loan or a Veteran Affairs Loan.
Your down payment helps a lender to determine the type of mortgage you qualify for. The mortgage company collects your financial information like income, employment, debts, assets, credit report, and credit score and estimates your down payment amount. Although there’s no single figure or percentage for a maximum down payment for a house, Putting down 20% to avoid mortgage insurance is an intelligent move.
According to the National Association of Realtors 2023 Home Buyers and Sellers Generational Trends report, 78% of all home buyers used a mortgage loan to buy a home. However, the same survey report also says that the average down payment for first-time home buyers was 7%. Conventional loan requires a minimum of 3% to 5% down payment for first-time homebuyers.
As evident, they have to take the extra burden of mortgage insurance. If you are constructing your home, you can exceed the conforming loan limits in a Jumbo loan but have to pay a larger down payment of at least 10%. The larger down payment lowers the mortgage interst rate, and you don’t need to pay for private mortgage insurance.
A 20% down payment takes years of savings and is only feasible for some. The different types of mortgage home loans provide various ranges for minimum down payment rates to buy a house.
Down Payment Requirement for Mortgage Loans
Down payment requirements for mortgage home loans depend on the type of loan you are applying for:
FHA Loans
The minimum down payment for a Federal Housing Administration (FHA) loan is 3.5 percent, which helps low- to moderate-income families attain homeownership. However, you have to pay PMI depending on the size of your down payment, loan amount, and loan term. You will have enough financial security for future unforeseen circumstances. It is more prevalent among first-time home buyers due to their more lenient credit core requirements. If you pay a 10% or more down payment, MIPs stick around for 11 years.
Jumbo Loans
The Jumbo loan is outsized and is not backed by any government agencies. It is the most common non-conforming conventional loan. The mortgages exceed the conforming loan limits the Federal Housing Finance Agency sets. The Jumbo loan has many qualifying guidelines to offset some of the risk payment.
VA Loans
U.S. Military Service personnel, their families, and veterans can qualify for zero-down loans because the U.S. Military and U.S. Department of Veteran Affairs backs it. You are eligible to get a mortgage without any broker fees or MIP. You have to pay a one-time funding fee that helps offset the taxpayers’ costs. You have to pay upfront, and the annual guarantee fee depends on your down payment.
Conventional Loans
The government does not back conventional loans. However, the conventional loan follows government-sponsored enterprise guidelines for down payments. You can keep the same interest rate for the life of the loan. The loan tenure is typically 10, 15, 20, or 30 years. You must keep the down payment of 20% – 25% to qualify for the conventional loan. Otherwise, you have to pay for mortgage insurance.
This mortgage insurance doesn’t protect you but only adds to your costs. A conventional loan is higher for people buying a second home, and a down payment typically starts from 10%. It is better to consult a mortgage agency about what type of loan suits your requirements.
Benefits of More Down Payment
A bigger down payment indicates your finances are more likely to be in order, and you can easily find a mortgage lender. The higher down payment puts the slightest risk on the lenders. A 20% down payment is widely considered ideal because you can avoid PMI fees, which is only a cost burden on you.
Fewer Interest Rates
The interest rate depends on the principal of the loan amount and the outstanding balance on the mortgage. After entering the down payment and loan terms, you can use a mortgage calculator to calculate your mortgage interest. You can adjust the loan terms and down payment to determine how much you can save to buy a house and make a sound financial decision.
If you put down at least 20% on your mortgage, you can have a low interest rate that keeps enough cash in your hand for regular or unexpected expenses. There will be no extra monthly expenses for PMI. With the lower down payment, you’ll waste much money on interest and fees over the mortgage terms.
Lower Monthly Mortgage Payment
The larger down payment reduces your loan principal, and so does your mortgage interest. A smaller loan and low mortgage interest save enough money for other repair and renovation work. A larger down payment increases your credit worth, giving lenders a positive sign about your financial stability and a reasonable credit risk.
Dont ignore that FHA and USDA loans offer a 3% to 5% down payment loan but require a monthly mortgage insurance premium in return for risk covering. Ultimately, this costs you more than a 20% down payment.
Less Debt
More down payment increases your home equity and your home value. In other words, your assets’ value is more than your debt. Once a borrower has built 22% equity in their home, the lenders automatically cancel the PMI. A 20% down payment is the minimum stake a homebuyer needs to contribute to buy a house. Increasing home worth provides more flexibility if you need to sell a house on short notice.
Less in Closing Costs
Closing cost arises through creating a home loan process and is to be paid at the closing of the mortgage. The standard closing cost includes appraisal fees, attorney’s fees , recording fees, inspection fees, escrow funds, etc., that you have to pay depending on your loan type and your home’s value. You have to set aside enough funds to cover a down payment and closing costs. The Closing costs on a mortgage loan usually equal 3% – 6% of your loan balance. You can negotiate with the seller on the closing cost if you have paid more down payment.
How Much Should I Pay for a Down Payment?
If you’re a first-time home buyer, a smaller down payment of 5–10% is okay, but you should be ready for the extra expense of mortgage insurance. So, any conventional or FHA loan is a good option. Putting less than 20% down into your first home sooner can start building income, and you can pay off your mortgage and PMI. The mortgage calculator helps you understand the costs and benefits of different down payments and monthly mortgage costs.
You can consult with an expert real estate agent to reach any decision. You should pay higher down if you have enough savings and credits. You can save an extra PMI cost and get extra monthly savings due to low mortgage interest. Your debts are reduced, and more likely, the closing can, too, because a higher down payment reduces the lender’s risk and increases your credibility. However, your decision should be well thought out after proper consultation with the expert.
Verify all aspects of your financial situation, credit history, income, expenses, etc. for any mortgage loan.
Do You Have to Put 20% Down on a House?
20% down payment is too big for many home buyers. Some simply cannot afford it because their financial situation needs to keep cash in reserve for future expenses. You have to save your emergency fund for the minimum down payment to buy a house. The better choice for you is to go for Government-backed loans. Though you must pay PMI and an increased monthly mortgage interest gradually, you can get rid of PMI if you pay off most of the loan principal. Conventional loan depends on individual lenders. Some lenders ask for a 5% down payment, while others ask for a 3% minimum. FHA loan has at least a 3.5% down payment requirement. If your credit score is between 500 and 579, you are required to put down at least 10%.
The mortgage calculator helps you understand how a specific down payment and loan tenure affect your monthly mortgage payment. You can check with different down payment amounts and see what works best for you. Add closing costs and a down payment, which you must pay as an initial investment to buy a house. Evaluate your budget and whatever is the case, but avoid using your entire savings for a down payment.
Compare different mortgage rates and consider all available mortgage options. Assess your home needs and all important factors and detrmine the minimum down payment you can afford without overstretching any aspect of your life.
Final Thought
Figuring out how much minimum down payment you should put into buying a home is always confusing. The numerous mortgage options allow you to opt for a 20% down payment or choose between the 5% to 10% range, whichever suits your financial state. Remember, the down payment is just the initial investment from your overall household budget. The buying process involves several other costs, which you must also manage.
