Down Payments 101: How Much Do You Really Need to Put Down?

Down payments on homes are a bit of a mixed bag; while a 20 percent down payment is considered the norm, it’s not the only option out there. There are ways to save on your down payment, but there are pros and cons to higher and lower percentages.

Lower Down Payment Mortgage Options

There are several different mortgage options that can help lower down payments:

FHA Loans: These loans are backed by the Federal Housing Administration, meaning that the FHA provides insurance on them through approved lenders. FHA loans allow down payments as low as 3.5 percent, making them a good option for first-time buyers.

VA Loans: VA loans are guaranteed by the Office of Veteran Affairs to be issued through private lenders, available to veterans, service members, and surviving spouses. The biggest advantage VA loans have in their corner is that if the home’s sale price is lower than its appraised value, no down payment is required.

USDA Loans: Backed by the U.S. Department of Agriculture, USDA loans also offer a zero down payment option for home in certain areas. The loans are typically issued by qualified lenders, but the USDA Rural Development Guaranteed Housing Loan Program can grant them directly to borrowers below a certain income limit.

Conventional Loans: The most common kind of mortgage loans, conventional loans are not backed by government agencies. They require a higher credit score, but are more flexible than other mortgage types, allowing interest rates as low as 3 percent and larger loan sizes.

Pros and Cons of Different Down Payment Amounts

20 percent is considered the norm for down payments because it’s the amount a homeowner needs to come up with to avoid mortgage insurance. 20 percent of the cost of a home is a steep ask, however, especially for first-time buyers.

A lower down payment means you’ll be able to afford a home sooner, and you can set aside the extra money for expenses such as inspections, appraisals, and closing costs.

It also means, however, that your monthly mortgage payment and your total interest rate will both be higher. Additionally, you’ll need to get mortgage insurance.

Mortgage Rates and Private Mortgage Insurance

PMI, or private mortgage insurance, is a requirement if you don’t put down a 20 percent down payment. It’s an extra monthly expense on top of your normal mortgage payment until you reach 20 percent equity on your home, at which point you can request to have it canceled. The lower your down payment, the higher your PMI payment will be, and it depends on the size of your loan.

Mortgage rates often depend on the size of the loan you’ve requested. A higher loan means a bigger risk to the lender, and thus they might require a higher interest rate to offset it. The inverse can also be true; a smaller loan means a larger down payment, and less risk for the lender.

Ways to Save on a Down Payment

The mortgage assistance programs mentioned above are great ways to save if you qualify for them, but they aren’t the only ones available if you don’t.

Most states and cities offer down payment assistance programs for buyers who meet certain criteria, typically related to income level, debt-to-income ratio, and credit score. There are also builder incentives that can help lower down payments for newly constructed homes.

Not having 20 percent of a house’s price doesn’t mean you have to give up on your dream of homeownership. Learning what assistance programs you qualify for and where you can save money are the first steps to finding your new home.

To learn more about down payments and the rest of the home-buying process, visit newhomesource.com/learn.