What Is a Down Payment, and How Much Do I Need?

When thinking about buying a home, many prospective homeowners wonder how much they will need for a down payment, and if a home purchase is in their budget. Here are some of the most frequently asked questions we receive from buyers regarding down payments and our answers for each.

What is a down payment?

A down payment is the amount of a home’s purchase price that you pay upfront and is your initial contribution toward the purchase of a home. In most cases, lenders require a down payment to finance a home. However, there are exceptions that we will explain below.

Do you have to put 20% down on a house?

Traditionally, the standard down payment amount on conventional loans was 20% of the purchase price. That means that if the house you wanted to buy cost $200,000, you’d have to put down $40,000 — a sizable chunk of change, which prohibited many people from becoming homeowners. Luckily, 20% is no longer the norm. There are many loan programs, both government-backed and conventional, that offer low down payment amounts.

How much is a down payment on a house?

What is the typical down payment on a house now? The average down payment for first-time home buyers was just 6% in 2019, according to the National Association of Realtors. It jumps up to 12% for all buyers and 16% for repeat buyers. So if you don’t have 20% to put down on a house, don’t worry. There are many loan programs and lenders that will work with your budget.

Wondering which loan programs enable you to put down a small down payment? Here’s a quick list.

• Veteran’s Affairs (VA) loans: 0% down
• U.S. Department of Agriculture (USDA) loans: 0% down
• Federal Housing Administration (FHA) loans: 3.5% or 10% down (depends on credit)
• Conventional loan 97 (available from Fannie Mae and Freddie Mac): 3% down
• The HomeReady Mortgage (backed by Fannie Mae): 3% down

These are some of the most popular low-down-payment programs. It’s important to look into the details of each loan program with a trusted advisor, as they each have their own requirements and implications.

Down payment considerations

When deciding which loan program to choose and how much to put down on a house, what should you consider?

Interest costs

First, the amount you put down determines the loan amount being financed. The lower the loan amount, the less interest you’ll pay each month and over time. So if you can afford a larger down payment, it will make for more affordable monthly payments and a lower overall cost. However, if you can’t and a lower down payment is the only way to get into homeownership, then that might be your best option.

Mortgage insurance

Another important factor to consider is mortgage insurance. In many cases, you have to pay private mortgage insurance (PMI) upfront and each month if you put down less than 20% on your mortgage. The purpose is to provide the lender with security in case you default. Some loan programs allow you to remove the PMI once you have 20% equity in your home while others don’t. The additional cost will add to your monthly payment and overall cost of your home, so it’s worth factoring in as you make a decision.

How much should my down payment be?

A larger down payment can help you avoid PMI and keep your interest costs down but isn’t an option for all prospective home buyers, especially those buying their first home. Making a smaller down payment can enable you to get into your first home without having such a large lump sum. While it will cost more in the long run, it beats renting for many as you can lower your monthly payment and build equity. The right amount for you will depend on your unique situation. Luckily, there is no shortage of options making homeownership accessible to a wide range of buyers.

As always, the OVM team is here to answer any questions you have about mortgages and we will help guide you through every step of the process. Give us a call or start your application today.