You’re thinking of buying a house. Maybe it’s a house with an attached garage (goodbye bone-chilling morning walks to the car). Perhaps it’s a home with storage space for your autumn decor (those closeted skeletons need a place to live, you know). Either way, you’re ready to own a place.
Then what’s getting in your way? Since you’re reading this blog, it’s likely the thought of a down payment that’s holding you back. Luckily, down payment requirements may not be as unattainable as you think.
So, how much down payment for a house? It depends.
A down payment is the cash you pay toward a home purchase upfront. The rest of the purchase cost is financed through a mortgage loan. For example, a 5% down payment on a $300,000 house would be $15,000. The remaining $285,000 would be the mortgage amount in this scenario.
Scared You’ll Never Have 20% To Put Down? You Probably Don’t Need To.
Does the thought of saving tens of thousands of dollars make you feel like you’re running from a killer in a slasher film? Don’t worry. The most typical down payment requirement is between 3% and 3.5% of the home’s purchase price? Yup. That talk about needing 20% down is a bit of an exaggeration.
Of course, the larger your down payment, the less you’ll pay over time in interest. And, you’ll probably have to pay private mortgage insurance (PMI) if you put less than 20% down. But that doesn’t mean you’re out of the homeownership game. In fact, according to the Realtors® Confidence Index, 52% of all people who get mortgages make a down payment of less than 20%. And get this – a massive 72% of all first-time homebuyers paid less than 20% down.
Why are so many homebuyers making smaller down payments? Because owning a place can save some serious bucks as compared to renting. It can be true even when you factor in PMI and the larger amount of interest paid over the life of the loan. Check out our recent blog on the cost of homeownership to crunch those numbers.
Think your down payment is too small? You might want to think again. Reach out to a mortgage professional to see what kind of home budget you may be able to qualify for. Plus, if you are eligible for a VA or USDA loan, you could skip a down payment entirely.
Private mortgage insurance (PMI) is an extra fee paid by borrowers with less than 20% of a loan’s value to invest up-front. The additional cost covers the lender since a lower down payment can mean more lending risk. PMI will probably run you between 0.6% and 2% of the mortgage loan amount per year.
The Truth About Your Down Payment
We’ll tell it to you straight… the larger your down payment, the less you’ll pay over the life of the loan. So, if you have the means to put more money down, go for it! But, if most of your paycheck goes toward bills and other essential expenses, it could be nearly impossible to scrape together 20% of a home purchase price. Don’t let that get you down. Save what you can and see what mortgage amount that down payment might help you qualify for.
And don’t forget that different loan types have different down payment requirements:
- Conventional Loan: 3% minimum down payment
- FHA Loan: 3.5% minimum down payment
- USDA Loan: No down payment required
- VA Loan: No down payment required
It’s About More Than The Down Payment
Now that you know 3% of a home’s price might be enough of a down payment to get you into homeownership, it’s time to consider some other important factors.
Your credit score and debt-to-income ratio are just as important as how much cash you have to spend upfront. Here’s why:
Your credit score
Lenders see your FICO credit score as a way to estimate the risk that you won’t repay your loan. That’s because your credit score is based on your loan repayment history (and other financial factors). For the majority of mortgage types, a 620 FICO score can help you qualify.
If 620 seems out of reach for you, don’t throw in the towel just yet. We know that not everyone has the same opportunity to build solid credit before buying a house – and so does the Federal Housing Administration (FHA). That’s why FHA home loans provide more credit score flexibility. A credit score as low as 580 might be just the key for this type of home loan. Plus, you’ll only be required to put 3.5% down (a credit score between 500 and 579 might qualify you with 10% down). What’s the downside, you wonder? FHA loans always require mortgage insurance payments. That’s because the more relaxed financial requirements can mean more lender risk.
Your debt-to-income ratio
Your debt-to-income (DTI) ratio is a comparison of your monthly income and the monthly payments you owe. Your DTI indicates the percent of your income (before taxes) that you spend on regular debt payments. That includes car payments, credit card payments, student loans, and anything else owed regularly.
Most lenders look for a DTI around 40% or lower (including your future mortgage payment). That means you’ll spend 40% or less of your income on monthly debt payments. This is a general benchmark. But remember, it’s not a hard cut-off. You might be able to get a home loan with a higher DTI percentage, or you might want to stay way under it. Having a lower DTI percentage means you’ll have more money left over for everything else you buy – groceries, car maintenance, home repairs, and maybe even a trip to the movies.
Debt-to-income ratio is a measurement of how your monthly income compares to the monthly payments you owe. It tells the mortgage lender what percent of your income (before taxes) you spend on regular debt payments.
So, How Much Down Payment for a House?
You’ve probably figured out that your down payment depends on the type of home loan you get, your credit score, and your DTI. While making a larger down payment on a home means you’ll spend less in the end, putting down as little as 3% can save you money over the life of the loan. Plus, you’ll build home equity, which means more wealth for you.
Connect with a mortgage expert today to run your numbers.