Saving money for a down payment on a home can be difficult, especially if you’re a first-time home buyer. However, the minimum down payment is not as high as you think. Here’s what to know about the average down payment for a first-time buyer and what’s needed to qualify.
Average down payment on a home for first-time buyers
Many first-time home buyers mistakenly believe that they need to put down 20% down to qualify for a mortgage. Fortunately, this is not the case.
The average down payment on a home for a first-time buyer was 7% in 2021, according to the National Association of Realtors. If you are looking to buy a $300,000 home, you will need to find $21,000 for a 7% down payment.
The average down payment for all homebuyers, not just new buyers, was 13%.
How to lower your down payment as a first-time buyer
You may be able to afford a lower down payment by applying for a low or no down payment mortgage.
Loans for home ownership with little or no down payment
- Conventional loans: If your credit score is 620 or higher, you may qualify for a conventional loan with as little as 3% down.
- FHA Loans: These government-insured loans have more lenient requirements. You may qualify if you can provide at least 3.5% down payment.
- VA Loans: VA loans are available to active duty military, veterans and their families with no down payment.
- USDA Loans: USDA loans are available to homebuyers in specific low- to middle-income rural areas. If you qualify, you can use one of these loans to buy a home with no down payment.
While a lower down payment makes home ownership more accessible, keep in mind that if you’re putting less than 20% down on a conventional loan (the most popular option) or an FHA loan, you’ll have to pay mortgage insurance, which protects the lender if you stop making payments. A lower down payment usually means you won’t qualify for the lowest possible mortgage rate.
Down payment assistance programs for the purchase of a first home
Many states and local municipalities offer down payment assistance programs for first-time home buyers, such as:
- Subsidies : A grant is essentially a gift that can help cover your down payment and closing costs. You will never have to pay it back.
- Repayable loans: A forgivable loan is a type of second mortgage for a specific number of years, usually with a zero percent interest rate. As the name suggests, you don’t have to repay this loan unless you move, sell, or refinance before a certain time.
- Deferred payment loans: Like forgivable loans, a deferred payment loan is a second mortgage with zero or low interest that you can use for a down payment. However, you will have to repay the loan when you move, sell or refinance.
To find out if you qualify for down payment assistance, ask your mortgage lender which programs they accept and if you qualify.
How much should first-time home buyers save?
How much you should spend on a down payment varies depending on your financial situation, comfort level, and other factors.
If you can afford the 20% down payment, this is often the smarter option since you’ll avoid mortgage loan insurance and potentially get a lower interest rate. However, you shouldn’t do this if it means losing all your savings. It is important to maintain an emergency cushion. You’ll also need funds for closing costs — more on that below — and expenses like furniture and home repairs after you move.
On the other hand: since your savings rate may never match the growth in house prices, getting just 3% off a conventional loan may be worth owning, even if it means temporarily paying mortgage insurance. Once you have enough equity, you may also be able to refinance at a lower rate down the line.
Other Home Buying Costs to Consider
While a down payment is usually the biggest expense for first-time home buyers, it’s not the only one. You’ll also need to cover mortgage closing costs – all of the expenses necessary to process your loan, such as origination, appraisal, and title fees. Closing costs range from 2-5% of the purchase price of a home.
Another cost you may need to consider: cash reserves. Not all borrowers need to have reserves, especially if you have a strong mortgage application, but it’s always wise to put some money aside should you find yourself unable to pay your mortgage. mortgage. If your lender requires reserves, you may need a month to six months of mortgage payments from the bank.
At the end of the line
While a 20% down payment on your first home has its benefits, it’s not a rule. Depending on the type of loan, your credit and other factors, you may qualify for a down payment as low as 3%, or be able to avoid a down payment altogether. You may also be eligible for down payment assistance. Overall, the amount of your down payment should help you achieve your dreams of home ownership while leaving room for you to work on other financial goals, like adding to an emergency fund. or repayment of debts.