When it’s time to buy a house, it’s easy to get caught up in all the excitement. You’re having a blast looking at styles, planning your decor, and of course, planning that big housewarming bash.
However, it’s important to consider how much house you can actually afford – and to figure out how much of a down payment you need long before you start browsing real estate listings.
“How much of a down payment do I need?” That’s a common question asked by aspiring homeowners everywhere, and while the general consensus is that 20% of the home’s selling price is ideal, 20% isn’t always necessary – or possible.
In this post, we’ll tell you everything you need to know.
What is a Down Payment?
First, what exactly is a down payment – and why do you need one? Essentially, this is just the cash you pay upfront to make a large purchase, like a home or car. It’s usually expressed as a percentage of a total price – so a 10% down payment on a $400,000 home would be $40,000.
When you apply for a mortgage, the down payment shows that you have some stake in the home. The lender will then front the rest of the money so you can buy the property.
Putting 20% down on a house is required for some types of mortgages, but there are exceptions. Loans that are backed by the federal government, like VA loans, FHA loans, and USDA loans, do not require the typical 20%.
VA loans, for instance, are guaranteed by the U.S. Department of Veterans Affairs and require no down payment at all. Even some conventional mortgages, like the Freddie Mac Home Possible and Fannie Mae HomeReady Loans, can require as little as 3% down.
Do You Have to Put 20% Down on a House?
The 20% down payment on a house is a somewhat antiquated idea – and it’s not always necessary. It does often make sense to put 20% down on a house, but if the idea is daunting – or not practical at all for your financial situation – the good news is that you might not have to spring for the full 20%.
There are a few pros and cons associated with the 20% down payment.
Pros
The 20% down payment is often considered the “ideal” down payment by lenders for most loan types.
If you can put 20% down, you’ll be able to remove PMI. PMI, or private mortgage insurance, is meant to protect your lender if you default on the loan. If you put less than 20% down, you’ll have to pay a small premium each month until you reach 20 – 22% equity in your home.
Putting 20% down will also help you garner better interest rates. If you are able to put this much of a down payment on the house, it shows that you are less risky to lenders, meaning you might be able to access lower interest rates and, of course, pay lower monthly payments.
Finally, a 20% down payment can be advantageous in a competitive real estate market. Sellers often prefer to work with buyers who put more money down, since it indicates that your finances are in order and you’re less likely to have problems finding a lender. If you’re buying a home in a hot market, putting more money down might make good financial sense.
Cons
Of course, there are a few situations in which putting the full 20% down isn’t exactly prudent, either.
For one, once you put that money down on your mortgage, you’re not going to get it back. If there’s any chance that you might need the money for something else later on, put less money down and build up your emergency fund first.
It also leaves less money for repairs. When you buy a fixer-upper or a house that looks like it’s going to need a lot of work, it might be wise to put less money down and save the cash for those expenses.
Finally, the most obvious reason why you might want to put down a smaller down payment is that it can take a longer time to save. Saving for a down payment, for some people, can take years – or even decades. If you were to wait until you had a 20% down payment, you might end up spending thousands of extra dollars in rent in the meantime – money that could be going into building equity in a home.
How Much Should You Put Down on a House?
Down payment requirements vary by lender and your own personal credit history, so it’s a good idea to research these before you get ready to apply for a mortgage.
For example, for an FHA loan, you can put as little as 3.5% down as long as your credit score is 580 or higher. However, if it’s lower than that, you’ll need to put at least 10% down.
Consider the type of loan you are applying for as well as your personal financial situation. Remember – the better your credit score, the better likelihood you’ll have that you can put less money down.
One final note here – all of these rates apply to people who are buying a primary home. If you’re purchasing a secondary residence or investment property, a 10-20% down payment is almost always required. VA, FHA, and USDA loans can’t be used to purchase these kinds of properties.
Can You Buy a House With Zero Down Payment?
You can buy a house without a down payment. However, most conventional loans won’t allow this – you’ll need to get a government-backed loan instead.
Because these loans are insured by the government, they pose less of a risk to lenders. The government is there to cover the financial loss if you default.
If you qualify for a USDA or VA loan, you can buy a home with no money down (in most cases). USDA loans are for homes in qualifying suburban and rural areas, while again, VA loans are for veterans and active-duty military members and their families.
Shop Around to Find the Best Rates and Terms
Although a 20% down payment isn’t always necessary, it’s a good idea to shop around to find the best rates and terms for your budget and needs.
When in doubt, get professional help.
As mortgage brokers, we’ll help match you up with the best lenders so you can shop interest rates, closing times, and of course, down payment requirements that best meet your credit score and available down payment amount. We’ll even help you navigate the tricky process of closing on your loan!
Educate yourself as much as possible before diving in. Buying a house is exciting and rewarding – especially if you have the knowledge you need to be empowered throughout the entire process.
