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Down Payments

Goal

This guide will help buyers understand the importance of a down payment and how it can affect the home buying process. Additionally, learn how to kickstart a down payment budgeting plan and how much to put down on a house. Securing a home has never been easier with these tips.

Let’s get started, home buyers!

What is a Down Payment?

A down payment is a large sum of money paid upfront as part of the home transaction. This secures a spot in homeownership and produces trust between the buyer and seller. The amount is expressed as a percentage of the price and can range from 3% to 20%. A down payment is a contribution towards the total purchase price and the lender will provide the remaining amount in order to buy the property. Most lenders will require a down payment depending on the type of loan the buyer selects. There are a few exceptions to this rule, including USDA and VA loans that are supported by government assistance.

What are the Down Payment Requirements per Loan?

Many home buyers believe they need to put down at least 20% for a down payment, but this is not necessarily true. While paying this amount will help increase the chances of obtaining a decent interest rate, this is not a requirement.  Down payment minimums are dependent on the following mortgage types:

Conventional loans: Conventional mortgages are not federally backed by the government but do follow strict guidelines that have been set by government-sponsored firms, Freddie Mac and Fannie Mae. Some conventional loans require as little as 3% down.

FHA loans: Backed by the Federal Housing Administration, this loan only requires 3.5% down.

VA loans: For military service members, veterans, and surviving spouses, VA loans are guaranteed by the U.S. Department of Veteran Affairs. This loan typically doesn’t require a down payment.

USDA loans: USDA loans are backed by the U.S. Department of Agriculture’s Rural Development Program, and are available for rural and suburban buyers that meet the program’s requirements and income limits. These loans also do not require a minimum down payment.

It is important to note that down payment requirements can also vary by lender and are dependent on the buyer’s credit score and history.

How to Budget for a Down Payment

Saving money for a down payment takes time and discipline. These traits are favorable for successful homeownership. First, set a goal for one year to develop the favorable down payment for a future home. In order to start saving, buyers need to determine a home price they can afford. This will give an idea of the down payment amount and help buyers determine which loan option is right for them.

Many buyers may find that their sole income alone is not enough to set money aside for a down payment. Therefore, it may be beneficial to pick up a side job, such as freelance work, selling unused items, or even asking for a raise. Hard work will put buyers one step closer to their dream home. Along with securing additional income, buyers should also cut out unnecessary spending. This may include:

  • Eliminating take-out and fast food purchases
  • Foregoing extravagant vacations for a year
  • Downsizing to a more affordable apartment or living arrangement
  • Commuting to work via public transportation or with coworkers to save gas money

Lastly, it pays to ensure all debts are paid off before starting a savings plan for a down payment. Student loans and credit cards are the top sources for American debt. When all debt is eliminated, interest rates will go down and credit scores will increase. This will help buyers save money in the long run.

Small vs. Large Down Payments

Generally, a large down payment is regarded as much more beneficial. A small down payment is often seen as a bigger risk for lenders. Some advantages of having a larger down payment include a better interest rate, more equity in the home, and a lower monthly mortgage payment. Conventional mortgages typically require buyers to pay for private mortgage insurance if they put less than 20% down. Larger down payments can help offset a lower credit score, while higher credit scores help offset a lower down payment.

However, there are certain circumstances where a larger down payment is not the ideal option, such as if the buyer does not have savings and carries high-interest debt. The right down payment amount depends on each buyer’s specific financial situation. While a larger down payment will guarantee lower monthly mortgage payments, buyers will need to consider an emergency savings plan to proceed with other responsibilities. A HomeHunt agent can help buyers make the right decision when it comes to making a down payment.

How Much to Put Down on a House

There is no concrete answer to how much a buyer should put down on a house since each buyer’s financial situation is different. To help buyers determine how much to put down on a house, buyers must choose the right mortgage by utilizing the following tools: 

  • Create a working budget to better understand how much to save for a down payment and an emergency savings plan.
  • Use HomeHunt’s Down Payment Calculator to determine how the total affects the monthly mortgage amount.
  • Do not use the entire savings account for the down payment since this can set buyers up for failure after the home purchase.
  • Conduct research on different mortgage companies and programs to find the best rate.

For more tips on how to budget for a down payment and become a successful homeowner, check out our eBook, Stop! Don’t be House Poor!, complete with printable worksheets and tips to get started.

Conclusion

Determining the right down payment, the right rate, and the right mortgage program is the foundation to having a successful mortgage experience. Contact HomeHunt today to get the home buying process started!