One of the biggest challenges when it comes to buying a home is coming up with a big chunk of cash. Life is expensive. Many first time home buyers have young families to support. They’re also more likely to be just starting out in their careers, maybe even paying off student loans. All that makes it harder to save. So how much down payment do you need to buy a home?
Well, it depends. Lenders like to see you put down 20 percent or more of the home’s appraised value. Don’t panic though, it’s very possible to buy a home with much less.
Your down payment is the amount of money you pay when you close on your home mortgage. It’s referred to as cash, but you don’t have to actually offer stacks of bills. A check or electronic payment is also acceptable.
Your down payment comes off the amount you’re borrowing and creates instant equity in your new home. A large down payment impacts your financed home price and monthly payment, but how much down payment you need to buy a home varies.
If You’ve Saved a Large Down Payment
Some people are just great at holding on to cash. If that’s you, good job! If you’ve worked just as hard at building good credit, you’ll probably be able to qualify for a better interest rate than lenders with no money down or poor credit. A conventional loan frequently offers the best terms when you have a 20 percent down payment.
In other words, if you’re buying a home that appraises for around $200,000, you’ll need to have $40,000 to put down. If you have that much, here are the benefits:
- Fewer fees upfront – mortgages that let you finance more sometimes charge extra.
- Lower monthly fees – avoid having to pay private mortgage insurance (PMI).
- Equity in your new home – without a down payment, it can take years to build a significant amount of equity.
- A lower payment – in the above example, your payment would be based on borrowing $160,000, not $200,000.
Keep in mind when you close on a home, there will be other expenses besides your down payment. You’ll also have closing costs, earnest money and possibly fees for a home inspection or survey.
If You Don’t Have a Big Savings Account
Bigger isn’t always better. Some families just don’t have that much, but otherwise, they’re ready to buy. They need more space and they’re tired of throwing money away on rent.
There are benefits to putting 20 percent down, but there are also benefits to finding a lender that will work with less up front. A smaller down payment allows individuals to buy a home sooner. Instead of saving for years, you get to enjoy your home now.
Even people who can afford to make a large down payment sometimes choose not to. They would rather have that cash for other things like emergency funds or investments.
You may have heard people referred to as “house poor.” They put all their money into buying a home, now they can’t afford anything else. It’s always a good idea to keep some money in reserve so you can buy a new home and enjoy the rest of your life.
Low Down Payment Options
Right now is a great time to buy a home. Rates are still relatively low. Supply is low too, so home values are steadily rising. Let’s look at some of your low down payment options.
- FHA Loans – An FHA loan is insured by the Federal Housing administration (FHA). Because of that insurance, borrowers don’t have to put down as much money. Credit requirements are also less strict than conventional loans. If your credit score is 580 or higher, you can probably get an FHA loan with as little as 3.5 percent down. If you’re between 500 and 579, you only need to come up with 10 percent down.
- Fannie Mae’s HomeReady Mortgage – This low down payment program only requires a 3 percent down payment and is available for borrowers with a credit score of 620 or better. It comes with other benefits like cancellable mortgage insurance and the ability to fund down payment and closing costs from multiple sources. It’s mostly for low-income borrowers, and has some regional restrictions.
- Conventional 97 Loans – This program is for first time and repeat buyers who have a down payment of just 3 percent. To qualify you’ll need a credit score of at least 620.
Other low down payment options are available. At WestWind Homes, we work with a network of lenders, so we’re always up to date on the best options for each situation.
No Down Payment Options
Some buyers are able to buy a home with no money down at all. If you’re a member of the U.S. military or a surviving spouse, you probably qualify for a VA loan. This no-money-down program is guaranteed by the U.S. Department of Veteran’s Affairs. Not only can you skip the down payment, you also won’t have to pay private mortgage insurance, and credit requirements are flexible. If this option is available to you, we’ll help you explore it.
Non-military borrowers can sometimes get no down payment financing with a USDA Loan. The U.S. Department of Agriculture offers rural housing loans for less populated areas.
Evaluating How Much Down Payment You Really Need
So how much down payment do you need to buy a home? Everyone’s finances are different, so it’s impossible to give a one-size-fits-all answer in a brief article.
However, we can give you a specific, personal answer when you sit down with one of our advisors. We’ll walk you through the mortgage application process basics. We’ll also help you figure out how much home you can afford, what your payments will be and how to buy a home even if you don’t have a lot of cash. Schedule your free and confidential consultation today.