How Big Does My Mortgage Down Payment Need to Be?
When it comes to buying a home, down payments are what throw many first-time buyers for a loop. Oftentimes, the source of frustration is figuring out just how much you should pay. If you’re looking for a straightforward explanation of how much you may need to put down on your home, we can help. By the end of this article, you’ll know exactly how much you’ll need to put away for your dream home!
What Is A Down Payment & What Is Its Purpose?
A down payment is a lump sum of money that you pay upfront as part of a loan agreement or sizable purchase. The amount of your down payment will be deducted from the total amount you’ll be borrowing. You’ll pay your down payment when you sign your home purchase documents at closing.
The main purpose of a down payment is to solidify your interest in the home buying process. It puts the lender at ease, because if you invest a substantial amount of money into your home upfront, you’re less likely to default on the loan in the future. Because paying a down payment lowers your perceived riskiness in the eyes of the lender, you may also enjoy a lower interest rate.
Minimum Mortgage Down Payments For Conventional, FHA, USDA & VA Loans
Now that you’ve got a good understanding of what a down payment is, let’s dive a little deeper. Depending on your loan type, you may be required to pay a specified down payment amount to secure the loan and purchase the home. In this section, we’ll fill you in on the average down payment for four common loan types: conventional, FHA, USDA, and VA.
Down Payment for Conventional Loan - 3% Minimum
At minimum, if you opt for a conventional loan, you’ll need to pay 3% or more of the total home sale price. Conventional loans are backed by private lenders, instead of a government enterprise.
Conventional Home Loan Pros
- They are available with both fixed interest rates and adjustable rates.
- They allow access to extremely high loan amounts if you have a high credit score.
- Low down payment option.
Conventional Home Loan Cons
- These loans are particularly hard to qualify for, especially if you have a low credit score or a high debt-to-income ratio. You need a credit score of at least 680 to qualify.
Down Payment for FHA Loans - 3.5 to 10%
The minimum down payment for FHA loans is 3.5%. These loans are backed by the government, and only FHA-approved lenders can offer them. They are much easier to qualify for than conventional loans, which makes them a prime option for people who don’t have the best credit.
FHA Home Loan Pros
- Good for people who aren’t in the best overall credit situation. Those with credit scores as low as 580 may qualify.
- Bankruptcies and foreclosures don’t automatically disqualify you.
- Low down payment option.
FHA Home Loan Cons
- FHA loan limits are restrictive to some borrowers.
- You won’t be able to buy certain homes due to loudness in the area or certain defects.
Down Payment for USDA Loans - 0%
There’s no down payment for USDA loans. This loan type is backed by the United States Department of Agriculture and is for people who have modest to low incomes. You can use it to finance the purchase of a rural home.
USDA Home Loan Pros
- It’s a zero-down-payment loan, which makes it very accessible.
- Guidelines for loan approval are very relaxed as compared to conventional loans.
- They often have low interest rates.
USDA Home Loan Cons
- You cannot use a USDA loan to buy a home located in an urban area.
- You will not qualify for this loan type if you make too much money.
Down Payment for VA Loans - 0%
VA loans don’t have any down payment requirements, which makes them very popular among veterans and current servicemembers. A portion of every VA loan is backed by the U.S. Department of Veteran Affairs.
VA Home Loan Pros
- You don’t have to pay a down payment.
- Often, homebuyers enjoy lower interest rates with VA loans than they do with other loan types.
- There’s no official minimum credit score requirement, though most lenders prefer to lend to people with a credit score of 620.
VA Home Loan Cons
- VA loans can only be used to buy a primary residence.
- It can be difficult to find a lender that knows how to work with the VA to service your loan.
Benefits of Putting a 20% Down Payment on a House
Though none of the above loan types require you to put 20% down on your home, there are some benefits to doing so:
- A 20% down payment will significantly lower your monthly mortgage payments.
- It increases your buying power and makes lenders take you more seriously.
- You won’t have to borrow as much money from your lender as you would have if you didn’t put as much money down.
- A 20% down payment could significantly lower your interest rate.
Benefits Of Putting Down More Than The Minimum
If you’re strapped for cash, you may not want to pay a higher down payment than you need to. But there are a couple of benefits of putting down more than the minimum.
The higher your down payment, the less you need to borrow and the quicker you’ll pay off your mortgage. Also, the more you pay upfront, the more likely your offer will be accepted by the seller. A substantial down payment communicates that you’re likely to cooperate up until closing.
Make a Savings Plan for Your Down Payment
Whether you’re aiming for 3% or 20%, saving for a down payment is a big endeavor. Our Money Management course will help you create a financial plan, pay off debt and save toward your goals. Take it online at your own pace!