The short answer: It depends. The main criteria for how much will be required as a minimum down payment depends on the type of mortgage, the lender and your finances.
It’s no small task to come up with enough cash for a down payment to buy a house. The down payment alone stops or delays the dream of home ownership for many prospective buyers. But how much do you really need to buy a home? Let’s explore it.
First, what is considered a down payment?
A down payment is the cash you pay upfront to make a large purchase on an item like a home or vehicle. A down payment is normally express as a percentage of the overall price of the item being purchased. As an example, a 10% down payment on a $250,000 home would be $25,000.
When you are going through the mortgage application process to buy a home, the down payment is your initial payment and ownership stake in the home. Your lender provides the remaining amount of the purchase price to the sellers on your behalf.
Most mortgage lenders require some sort of down payment when you are purchasing your home. However, there are some exceptions to down payment requirements. Two loans backed by the federal government, VA and USDA loans, usually do not require a down payment.
What Are Minimum down payment requirements?
As a general rule, putting 20% (or more) down on a home will increase your chances of getting approved for a mortgage with a low interest rate and will allow you to avoid mortgage insurance.
But you can put down less than 20%. Some lenders have created loan structures to allow less than the 20% down payment and combining two mortgages to avoid mortgage insurance. The minimum down payment required for a house varies depending on the type of mortgage:
- FHA loans are backed by the Federal Housing Administration and they can require as little as 3.5% down.
- VA loans are guaranteed by the U.S. Department of Veterans Affairs and usually do not require a down payment. However, VA loans are only for current and veteran military service members or their eligible surviving spouses.
- USDA loans is a home loan program backed by the U.S. Department of Agriculture’s Rural Development Program which has no down payment requirement. USDA loans are designed for rural and suburban home buyers who meet the program’s income limits and other criteria.
- There are some conventional mortgages, such as the Fannie Mae HomeReady and Freddie Mac Home Possible mortgages available with a down payment requirement as low as 3%. Conventional loans are not backed by the government, but follow the down payment guidelines set by the government-sponsored enterprises Fannie Mae and Freddie Mac.
Just like government sponsored down payment requirements, requirement can also vary with private lenders and rely heavily on your credit history. The minimum down payment for an FHA loan is just 3.5% with a credit score of 580 or higher, for example, but the minimum is 10% with a credit score of 500 to 579.
What are the benefits of a larger down payment?
Life “stuff” happens all the time, and that makes saving money a real challenge. So, a zero or low down payment may speed up your ability to buy a home, but is it the right choice? Here are some advantages of making a larger down payment:
- A better mortgage interest rate.
- Lower upfront and ongoing fees.
- More equity in your home right off the bat.
- A lower monthly mortgage payment.
Your lender also considers a lower down payment a bigger risk for them. The federal government helps reduce this risk by guaranteeing a portion of the loans in the FHA, VA, and USDA loan programs. If a borrower defaults on one of the loans in these programs, the associated government agency will pay the lender the guaranteed portion of the loan.
The risk can also be offset by you (the borrower) paying for mortgage insurance, depending on how your mortgage is structured.
Conventional mortgages usually require you to pay for private mortgage insurance if you put down less than 20%.
So…how much should you put down on a house?
We started out with the answer: It Depends. So why did we answer that way? The right down payment amount is unique to you. When determining your down payment amount, you should be considering both short-term and long-term financial goals as well as your current financial situation. A larger down payment will lower your monthly mortgage payment but choosing to put down too much cash could leave you without the cash on hand for improvements to your new home. Keep in mind you will want to personalize your new home with new decorating, technology or structural upgrades, and many other ways you have to turn your new house into your home.
