One of the big mysteries for first-time buyers is the amount of their down payment. For years there has been a myth that it takes 20% down to buy a house. It’s not true!
In fact, the average down payment on a house for a first-time buyer is approximately 6% of the purchase price. For buyers who have already purchased, it rises to around 12%. These two figures are far from 20%.
Remember that the minimum down payment depends on the type of loan, the lender you choose and your current finances.
Let’s take a look at some of the most popular loan programs and their respective down payment requirements. One of the covered loan programs should be a great option before making an offer on a home.
What are installments?
The down payment is the amount of money you pay out of pocket when buying a home. You get a mortgage from a lender to pay the rest of the purchase price of the house over a number of years. This is called the term of the loan.
Down payments are often referred to as a specific percentage of the purchase price. For example, a 10% down payment on a $500,000 home would be $50,000.
When you buy a house, the amount of money you have invested will become your equity on the day of purchase. The mortgage lender you choose to work with will provide you with the rest of the money to buy.
For most mortgage programs, you will need a down payment. However, there are a couple that don’t require a down payment, including a VA loan and a USDA mortgage.
The myth of the 20% mortgage
For years, many people have assumed that a 20% down payment is needed to buy a home. The confusion is probably because if you put down less, you’ll have to pay for private mortgage insurance.
Private Mortgage Insurance or PMI is a fee that helps protect lenders in the event of a loan default on their mortgage. You can get rid of the private mortgage insurance payment when your principal reaches 20%.
Low and no down payment mortgage programs
Here’s an overview of the down payment requirements for some of the most popular mortgage programs.
No loan with down payment
The two no-down payment mortgage programs are a VA loan and a USDA loan. VA mortgages are for current and former military service members and their eligible spouses. These loans are guaranteed by the US Department of Veterans Affairs.
USDA loans are backed by the United States Department of Agriculture. A USDA mortgage can only be used for the purchase of rural property, which is generally considered under a population of 35,000. You must also qualify for the program’s income limits.
A qualified mortgage broker or lender can guide you through these two loan programs.
Conventional mortgages at 3% down
There are two popular conventional 3% down mortgage programs. They are known as HomeReady and Home Possible. These conventional loan programs are not supported by the federal government, but rather follow the guidelines set by Freddie Mac and Fannie Mae.
FHA loans are one of the most popular mortgage programs due to their 3.5% down payment requirement. They also have some of the most lenient credit scoring requirements. These mortgages are guaranteed by the Federal Housing Administration.
If you have a credit score of 580 or higher, you will be able to deposit 3.5%. If your credit score is between 500 and 579, an FHA mortgage will require a 10% down payment. However, some lenders may not grant the loan when the credit score falls below 580.
Disadvantages of a lower down payment
- When real estate markets favor sellers, low down payments are not viewed favorably due to potential valuation issues in bidding wars. Quite often, low down payment borrowers cannot bridge valuation gaps.
- Higher down payments usually get the best interest rates from lenders.
- A higher down payment will provide a lower monthly mortgage payment.
- You will have less equity in your home with little or no down payment.
What to put on a house
The amount of money you put on a house depends on your financial situation. Do what is best for you. Always remember to have an emergency fund. Murphy’s Law can (and will) happen when you least expect it.
Bill Gasset is a nationally recognized real estate leader helping people buy and sell real estate in the Massachusetts metro area for 35 years. Bill is the owner and founder of Maximum real estate exposure. For the past decade he has been one of the top RE/MAX REALTORS® in New England.