For decades, it was one of the few hard-and-fast rules when purchasing a home: Put twenty percent down. Times have changed, but people's belief that twenty percent is absolutely required has not. Twenty percent is more of a myth than reality. There is a massive range of possibilities when it comes to making a down payment--from as low as three percent to twenty percent or more.
Even for those who have a massive chunk of change sitting in the bank, and buying a house with cash has become increasingly popular, most people will need to borrow some amount of money to buy a house. The money they have on hand will go toward the down payment.
A down payment is a percentage of the home's purchase price. The borrower needs to bring to this amount--whatever it is--to the table.
Whenever you apply for a mortgage loan, you will most likely be required to have a down payment, but twenty percent is no longer the norm. For example, if you buy a home for $200,000 and five percent down payment, you will need about $10,000 in cash. The remaining $190,000 will come from the lender in the form of a loan.
Long gone are the days of needing at least a twenty percent down payment to get approved for a mortgage. The last data pulled from 2016 shows that the average down payment on a house was about $14,000, or six percent of the purchase price.
How much a person truly needs for a down payment depends on their situation. Their financial circumstances, home location, and price of the home are all important factors.
Types of Loans and Their Down Payments
Just as the options are endless while you're house hunting, you'll find many loan options to choose from. All the loans mention are available from most lenders in the U.S. There are many options to explore, and you're sure to find the best one for you!
- Conventional loans are mortgages that are issued by private lenders. They are not backed by the government, and they usually require between a five and twenty percent down payment.
- FHA loans are government-back mortgages that are insured by the Federal Housing Administration. This type of loan is particularly popular with first-time buyers because of the loan’s low credit score and down payment requirements. The combination for a buyer can be a credit score as low as 500 and ten percent down. A credit score of 580 can knock the down payment to about 3.5 percent.
- FHA 203k loan is a type of home renovation loan that lets you refinance repairs that need to be done to your property. Most of the requirements necessary to qualify are the same as regular FHA loans except you’ll need a credit score of at least 640.
- If you are a veteran, you can qualify for a VA home loan with no down payment. While there is no down payment, there is an up-front funding fee of 1.75 percent of the loan amount, which can be rolled into the mortgage.
- The US Department of Agriculture developed a loan program to push low-income homebuyers in rural areas of the country apply for a home loan they can afford.
Benefits For A More Substantial Down Payment
If you can afford to throw down a down payment that is quite larger than the required amount, should you? While there are ways to get around more significant down payments, there sure are many benefits to making a more substantial down payment.
You are more likely to get approved for a mortgage with a more substantial down payment. If you find yourself in one of those sticky positions where multiple buyers are going for the same property, offering the seller more money up front can be the key to beating other prospective buyers.
A lower interest rate is often offered when your loan-to-value ratio is more economical. Lower interest rates can save you huge amounts of money over the life of the mortgage. The interest rate can also be lowered based on your credit score.
A more significant down payment means a smaller mortgage. A lower mortgage means smaller monthly payments. Smaller monthly payments automatically free up more funds in your monthly budget. And I don’t think you could find anybody would complain about that. With a lower monthly payment, you might use some of that freed up funds to make some extra principal payments.
Whether you choose to buy with cash or go with a mortgage-- Clever can save you thousands on commission. If you're in the market for an excellent full-service realtor who can help you along the way, Call us today at 1-833-2-CLEVER or fill out our online form to get started.