First off, what is the down payment? It is your skin in the game, the upfront cash you pay to get a home loan, and it’s generally expressed as a percentage of the homes purchase price. For example, if you put down 20 percent of the cost of the home, you’ll need to borrow 80 percent from a lender.
The down payment is important because it represents your initial investment in the home. It also affects how much money you’ll need to finance, what rate you might get and it will impact your monthly mortgage payments. A larger down payment could mean a lower interest rate, and that could mean big savings over the life of your loan.
You might be able to get help with a down payment and other costs through state or local programs, as well as financial assistance from the seller. Gifts from family members are also allowed in many cases. Whatever your source of funds, just make sure you have a paper trail so you can show where the money came from when you’re applying for a loan.
If you’ve got a solid credit score and manageable debts, a lender may well allow you to borrow more and put down less. Additionally, different types of home loans have different down payment requirements.
If you’re not one of the lucky few who can pay cash upfront, you’ll need to start saving. The sooner you start, the better.
A good rule of thumb is to aim for a down payment of 20 percent of the home’s purchase price. That way, you’ll avoid having to pay private mortgage insurance (PMI), and your monthly payments will be lower.
Of course, 20 percent is a lot of money, and it may not be realistic for you. In that case, you’ll have to decide how much you’re comfortable borrowing. Keep in mind that the more money you borrow, the higher your monthly payments will be.
Conventional loans are the most common type of mortgage. They adhere to conforming loan standards set by Freddie Mac and Fannie Mae. This means the down payment requirements are typically lower than for other types of mortgages.
For a conventional loan, you’ll usually need to put down at least 3 percent of the home’s purchase price. You can put down more if you want, but you won’t get any tax benefits.
These standards can make qualifying for a conventional mortgage harder. However, with solid financials, you can make a down payment as low as 3%.
FHA loans are insured by the Federal Housing Administration and have more flexible qualification standards. With an FHA loan, you can put as little as 3.5 percent down on a home. This is good news if you don’t have a lot of cash saved up for a down payment. But be aware that your mortgage payments will be higher because you’re borrowing more money.
For FHA loans, the minimum down payment is just 3.5 percent of the home’s purchase price, even if your credit isn’t the best. If you can come up with a larger down payment, your mortgage payments will be lower and you’ll build equity in your home more quickly.
The government insures the loan, so that’s why the standards are more lenient.
If you are a veteran or active duty service member, you may be eligible for a VA home loan. This type of loan comes with a number of benefits, including no down payment and no private mortgage insurance requirements. The USDA loan program also has a no-down-payment option.
VA loans are also available to eligible active-duty service members, veterans and their spouses. No down payment is required, and you can often get a lower interest rate than with other types of mortgages, which can make buying a home a lot more affordable.
For VA loans, there’s no set down payment amount, but you will be required to pay a funding fee, which can range from 1.25% to 3.3% of the loan amount. The fee goes toward paying for the VA’s mortgage insurance program.
If you’re looking for a mortgage that goes beyond the conforming loan limit, you’ll need to look into jumbo loans. Jumbo loans are a type of mortgage that falls outside of the conforming loan limit. This means the home’s purchase price is above the maximum amount that Freddie Mac and Fannie Mae will finance.
Because these mortgages can’t be insured or backed the way other loans can, lenders often require higher down payments, starting at 10% or 20% of the home’s purchase price. With a jumbo loan, you can still put as little as 10% down and get low interest rates, but you’ll need to have strong credit and income to qualify.
You can often find good deals on jumbo loans if you shop around and compare rates from different lenders.
The Bottom Line
No matter what type of home loan you’re looking for, there are down payment options to fit your needs and budget. The best way to find the right mortgage for you is to compare interest rates, fees, and down payment requirements. You can also talk to a mortgage loan officer to learn more about your options.
Now that you know a little bit more about down payments, it’s time to start saving up for your new home! Just remember, the larger your down payment is, the less money you’ll have to pay in interest and the more equity you’ll build in your home. So start socking away that money and you’ll be in your new home before you know it.