Personal Finance

How Much Down Payment Do You Need To Buy A House

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 6 minute read

Do you zone out when your real estate agent starts comparing conventional loans to FHA loans or VA loans to USDA loans?

No doubt, the down payment needed to secure a loan might vary depending on the type of loan. However, for each particular consumer, only a handful of best mortgage loan alternatives exist, each with its own minimum down payment requirements.

It is not necessary for you to learn everything there is to know about mortgages. To get a feel for how much of a down payment you’ll need when purchasing a home, you need to be familiar with the fundamentals.

How Much Down Payment Do You Need to Buy a House?

Traditionally, a minimum 20% down payment was required of homebuyers. This safeguarded both the borrowers and the banks by preventing them from incurring debt that they were unable to service.

However, as a result of government initiatives to increase homeownership rates, down payments were progressively smaller until they hit a record low during the housing bubble of the mid-2000s. Too much laxity in lending led inevitably to the 2008 financial crisis.

Even though underwriting has tightened, low down payment loans continue to be popular. Though a smaller down payment may be required by the loan you’re applying for, that doesn’t imply it’s all you’ll need to close on a property. The minimal amount required for a down payment isn’t always reflective of how much you should be putting up.

Requirements for a Minimum Down Payment

The days of having to put nothing down are long gone, but there are still some exceptions. Veteran families and purchasers in some rural regions are included.

Those who are not the initial purchasers should save up at least 3% and perhaps considerably more. How much extra you’ll pay is determined by a number of variables, including, but not limited to, your credit history and the type of loan you’re applying for.

The Least You Should Save for a Down Payment

Warning: the vast majority of applicants are not eligible for VA or USDA loans. If that’s the case, it’s obviously not 0%. Conventional loans and FHA loans have different minimum down payment requirements.

However, it might be difficult to estimate how much of a down payment you’ll need. Though your credit history and other financial details will play a part, the sort of loan you qualify for will determine much of the rest.

Conventional Loan

The term “traditional loan” is seldom used without good cause. If you picture yourself applying for a loan from a bank, chances are you’ll see one of these more conventional mortgage schemes.

Fannie Mae and Freddie Mac, two government-sponsored mortgage giants, have strict loan policies that conventional loans must adhere to. Be aware, nevertheless, that only individuals with stellar credit histories should consider applying for these types of loans. 

Additionally, a minimum score of 620 is often required for admission. HomeReady from Fannie Mae and Home Possible from Freddie Mac both allow qualified borrowers to put as little as 3% down on a home. Credit-challenged applicants, on the other hand, will likely be required to make a down payment of 10% to 20% or more.

FHA Loan

The goal of the FHA’s alternative loan program is to make homeownership possible for first-time purchasers with lesser incomes or credit ratings. The pitch: 3.5% down is required for applicants with credit scores over 580, and 10% down is required for consumers with credit scores between 500 and 579 to qualify for an FHA loan.

That seems like a good sales pitch, but the FHA lost so much money on defaults during the Great Recession that they changed the standards. In the past, after a loan’s value had been reduced to 80% of the value of the house, mortgage insurance may be dropped. In contrast, FHA loans now necessitate that applicants keep paying the mortgage insurance fee for the duration of the loan.

You will still be required to pay mortgage insurance even after twenty years have passed, but your neighbor with a traditional loan may contact their lender after a few years to cancel private mortgage insurance and save a few hundred dollars a month.

However, if an FHA loan is your only option, you may always take the hit on mortgage insurance now and try to refinance or pay off your mortgage early with the savings you’ve made.

Veterans Administration Loan

Loan officers can tell you more about VA home loans if you are a veteran of the armed services. Not only do these loans, which are guaranteed by the United States government, allow for zero down payments, but they also have other attractive features. The interest rates for loans from the U.S. Department of Veterans Affairs are normally rather high.

Additionally, the VA financing charge is not required for VA loans but private mortgage insurance is still required. You should use this perk of military service to your advantage and apply for a loan. Even if they say they only need a 0 percent down payment, it doesn’t imply you can’t put down more money if you want to.

USDA Loan

The United States Department of Agriculture (USDA) provides loans to rural communities at preferential rates and in other ways to help stimulate their economy. However, wanting peace and quiet is not enough to qualify for such a lifestyle. Borrower qualification is the easy part; the property itself must be located in a suitable area. In order to see if you qualify for the USDA’s Rural Development Program, you may do so by looking at their online eligibility map.

Further, the local subsidized nature of these loans allows for more favorable conditions than would otherwise be available. First of all, there is the infamous zero-down payment plan. Not only are they not as strict as conventional loans, but also don’t reject borrowers only because of credit history. In contrast to Federal Housing Administration (FHA) loans, conventional mortgages need only a guarantee fee.

If you and the property you want to buy meet the requirements, a USDA loan might provide you a lower rate than a conventional mortgage.

So, how much should you put down when buying a home?

You should only put down 20% if you have excellent credit and a large emergency fund. You may skip PMI, save on closing costs and interest on your mortgage, and have an easier time being approved. While that may be possible for some, it’s not for everyone. To that end, you should go as near as possible.

Should you take the leap if you just barely have enough to buy right now, or wait and save up?

Whether or if buying will be less expensive in the long run is something to consider. Even after accounting for the cost of repairs and maintenance, renting might be more expensive than buying in some areas. There are other cities where rent is significantly cheaper, such as San Francisco.

If you want to do any sort of “home hacking,” buying could be a good idea. For almost a decade, I haven’t paid market rate for a home, and I don’t miss it. Don’t make a purchase if doing so will deplete your savings or put undue stress on your budget. Homeowners, in contrast to renters, require a larger financial cushion to cover the cost of unexpected property repairs and maintenance. Don’t risk financial ruin to buy a house.

Bottom Line

Most people’s homes are the single most expensive and significant purchase they will ever make. Planning how you will pay for a property should begin far before you even begin your search.

Finding the money for a 20% down payment can save you time and money in the long run if you can manage it. As a homeowner, you also have less of a chance of falling behind on your mortgage or losing your house altogether.

Improving your credit score and switching to a conventional mortgage from an FHA loan might help you save money even if saving for a significant down payment is out of the question.

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