Many people believe they need a 20 percent down payment to buy a house, but it’s possible to purchase even a brand-new house with as little as 3.5 percent down — or even nothing down at all.
While a larger down payment can be helpful, there are plenty of factors that go in to determining how much money you’ll actually need. And of course, this is all part of a larger question
How Much Money do You Need to Buy a House?
In addition to the down payment, which we’ll go into detail about in a bit, there are other expenses in addition to the actual listing price of a home.
Most of these can be summed up in the closing costs, which include expenses such as the earnest deposit, the inspection and appraisal of the property, and other things like title insurance and a portion of property taxes. It’s estimated that you’ll need between $7,000 and $10,000 set aside for closing costs, in addition to any money toward a down payment.
So, What can that Down Payment Look Like?
The minimum down payment to buy a home required for a conventional loan that conforms to Fannie Mae or Freddie Mac guidelines with a loan amount up to $417,000 is just 5 percent of the house’s purchase price. If the amount is larger than $417,000, the down payment can be as low as 10 percent.
“Most lenders have jumbo loans with a little bit over 10 percent down payment available in the marketplace,” Sozio says.
Even smaller down payments are allowed for conforming loans, like Fannie Mae’s 3-percent program, says Ryan Rosenthal, Pacific division builder manager at Prospect Mortgage, a mortgage company in Sherman Oaks, Calif.
The minimum down payment to buy a home with an FHA loan is just 3.5 percent of the home’s purchase price. That means the down payment for, say, a $250,000 home would be just $8,750 with this type of loan. FHA loans are insured by Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD), a federal government agency.
VA and USDA Loans
VA loans, guaranteed by the U.S. Department of Veterans Affairs (VA), and USDA loans, backed by the U.S. Department of Agriculture, don’t require a down payment at all, which means buyers can buy a house with very little cash up front. The VA loan is open to most active-duty military personnel and U.S. military veterans, among other groups. The USDA loan is available in rural and outlying suburban areas.
Conventional, FHA, VA and USDA loans all allow at least part of the buyer’s down payment to be a gift from a family member or funds from a down payment assistance program. “With FHA, 100 percent of the down payment can come from gift funds, and with the 5 percent down conventional, all 5 percent can be a gift,” Pearson says.
Some builders will allow buyers to save up part of the down payment during the home’s construction if, Sozio says, “they’re pretty close” to the amount they’ll need.
Low-down-payment home loans typically involve mortgage insurance or a funding fee. The insurance is paid monthly. The fee is paid upfront, but can be financed as part of the loan amount or through a higher interest rate.
“FHA will always have mortgage insurance. VA will have a funding fee. Conforming loans will have mortgage insurance, until the point that you put down 20 percent. At 80 percent loan-to-value, mortgage insurance is no longer necessary,” Pearson explains.
Without mortgage insurance, lenders wouldn’t be able to offer low-down payment loans and borrowers who don’t have a lot of cash wouldn’t be able to purchase a home.
The down payment requirements for a newly built homes are almost always the same as the requirements for an existing home, but there are two possible exceptions. The first exception is custom-built homes.
Many new construction homes are production houses built in large volume by homebuilding companies. These generally aren’t considered custom homes, even though they come with plenty of personalized options.
A true custom home means the buyers obtained financing to purchase land and hired a builder, and often an architect as well, to construct a home especially for them. In that case, the lender generally will require a larger down payment since the house doesn’t exist yet, Hollensteiner explains.
“With custom homes, when the buyer is responsible for financing the construction costs, buyers typically use a construction-to-permanent, or C2P loan. With the construction-perm program, there is a difference in the down payment (compared with) an already-built home,” he says.
The second exception is newly built condominiums.
Whether a buyer will need a larger or smaller down payment in this situation depends on the lender’s guidelines, type of loan, property location and proportion of units that have been pre-sold during the construction phase.
Rosenthal cites Florida and Las Vegas as two places where lenders might require a larger down payment and higher proportion of presales for a buyer to finance a newly built condo. “It’s a little tougher (to buy with a low down payment) in those markets,” he says.
The bottom line is that most people don’t need a big down payment to buy a house — and some don’t need any down payment at all.
The only way to find out for sure is to talk to a lender. “A lot of people have the income and means to buy a new home and are stuck on the notion, for whatever reason, that they can’t do it,” Pearson says. “I think they’d be surprised that they actually could qualify.”
Marcie Geffner is an award-winning freelance reporter, writer and editor in Ventura, California. In the last decade, she has penned more than 1,000 published stories about residential and commercial real estate, banking, credit cards, computer security, health insurance and small business, among other subjects. Editors describe her as “detail-driven,” “conscientious,” “smart” and “incredibly versatile.” Her award-winning reporting has been lauded as “rock solid,” “spot-on relevant,” “informative,” “engaging,” “interesting” and “nuanced.” Her stories have been cited in seven published nonfiction books and two U.S. Congressional hearings.
Prior to her freelance career, Geffner was senior editor of California Real Estate magazine. Later, she became managing editor of Inman.com, an independent real estate news website. She also has prior employment experience in technical writing, corporate communications and employee communications. She received a bachelor’s degree in English with high honors from UCLA and master’s degree in business administration (MBA) from Pepperdine University in Malibu, California. She enjoys reading, home improvement projects and watching seagulls at the beach.