How Much Do You Need For a Down Payment?
Are your savings holding you back from buying a home? While pulling together a down payment large enough to reach 20% of your purchase price can eliminate mortgage insurance, many homebuyers are making down payments of less than 20%.
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What is a down payment?
A down payment is the amount of money a borrower pays upfront toward the purchase of a home. It’s typically expressed as a percentage of the home’s purchase price.
For instance, if you're buying a home for $300,000 and commit to a down payment of 10%, that’s $30,000. The rest of the purchase price is covered by your mortgage loan, which you pay back over time with interest.
What is the minimum down payment on a house?
The minimum for a conventional loan, one not backed by the federal government, is 3%, but lenders will usually require private mortgage insurance (PMI).
How much should you put down on a house?
A down payment option of 20% is often recommended, but putting down less, such as 10%, is still a solid choice for many homebuyers, especially those with good credit and stable income.
However, putting down less than 20% usually means you’ll need to pay private mortgage insurance (PMI), which adds to your monthly mortgage payment.
PMI is a type of insurance that protects the lender if the borrower defaults on the mortgage. While it might seem like a drawback, it’s worth considering PMI if it means you can buy a home sooner and start building home equity.
Do you need to put 20% down on a house?
While a 20% down payment option offers benefits like avoiding PMI, it’s not necessary for most homebuyers because of loans like FHA, VA and USDA that require much less.
A 20% down payment helps you avoid PMI and lowers your loan amount, but many buyers opt for a lower down payment option to keep cash for other needs.
Choose a down payment option that aligns with your budget and long-term goals.
Pros and cons of a smaller down payment
Pros
- More cash in your pocket: A smaller down payment option keeps more cash available for other expenses like closing costs or building an emergency fund.
- Quicker homeownership: You can get into the home market more quickly if you aren’t saving for a larger down payment, which can be crucial in high-demand areas such as California, where real estate prices rise rapidly.
- Potential for attractive interest rates: With a strong credit score, you may still secure a favorable interest rate, even with a lower down payment.
Cons
- Increased loan amount: A lower down payment option means a higher loan amount, which can raise your monthly mortgage payment.
- Private Mortgage Insurance (PMI): You'll likely need to pay PMI with a down payment below 20%, potentially adding hundreds of dollars to your monthly expenses.
- Longer path to build equity: It may take more time to build home equity compared to higher down payment options, which could affect your long-term financial goals and overall personal finance strategy.
Down payment requirements by loan type
Different loan programs have different down payment requirements. FHA loans, which are backed by the Federal Housing Administration, often require a minimum down payment option of 3.5%.
VA loans, offered through the Department of Veterans Affairs, and USDA loans, provided by the U.S. Department of Agriculture, sometimes offer the chance to buy a home with no down payment at all.
Conventional loans backed by private lenders may require anywhere from 3% to 20%, depending on your credit score and financial situation.
Down payment assistance
Many state and local governments offer down payment assistance programs designed to help first-time homebuyers cover the cost of their down payment.
Various entities, such as state housing authorities, cities and counties, offer different forms of down payment assistance, such as grants and second liens.
Grants
Though the benefits vary, down payment grants can be used toward a variety of home purchase expenses, including down payment, closing costs, and even renovations and repairs.
Down payment assistance programs (DPAs)
Down payment assistance programs often come in the form of a second mortgage with low or no interest rates. These loans are offered by city and state government and can often be deferred or in some programs completely forgiven over time.
Mortgage credit certificate (MCC)
While not a form of down payment assistance, a mortgage credit certificate (MCC) can be issued by state or local government and allows a taxpayer to claim a tax credit for some portion of the mortgage interest paid during a given tax year. An MCC is not a tax deduction and could provide a dollar-for-dollar tax credit to recipients to help increase housing payment affordability.*
No matter your location or financial situation, DPA programs are worth a look. With thousands of programs across the country to choose from, the right DPA could give you a boost and help get into your dream home!
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*Rate does not provide tax advice. Please direct all tax questions to your tax adviser.
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