When you start thinking about buying a house, you will probably first consider whether you have enough money saved for the down payment.
Your down payment is an important part of the mortgage process. It plays a role in determining your monthly payments and helps you qualify for certain loan programs. But don’t be discouraged if you aren’t able to put 20% down. There are many different types of loan programs out there, some of which have much lower down payment requirements.
In this post, we take a look at common loan programs and their down payment requirements, what the average down payment is, how you can evaluate how much you should put down, and how Private Mortgage Insurance (PMI) will play a factor in your decisions.
What Are Some Common Loan Program Down Payment Requirements?
Each loan program has its own minimum down payment requirement. Here are the most popular types of loans and their respective terms:
- Conventional Loan: This is the most common mortgage in the U.S. and requires a minimum of 3% down. If you have a credit score below 620 or a large amount of debt, your lender may require a larger percentage down.
- FHA Loan: FHA loans help potential homebuyers with low-to-moderate income achieve homeownership. This government-backed loan program allows for down payments as low as 3.5%, with a minimum credit score of 500.
- VA Loan: The VA home loan is available to service members, veterans, and eligible surviving spouses. The U.S. Department of Veterans Affairs backs a portion of the loan, allowing lenders to provide more favorable terms, including no down payment requirement.
- USDA Loan: The U.S. Department of Agriculture backs USDA loans, and their primary goal is to help smaller, rural communities thrive by making property in those areas more affordable. Like VA loans, USDA loans can allow you to buy your home with no money down.
What is the Average Down Payment on a Mortgage?
After learning about each program’s different requirements, you might still be wondering what the average down payment is and where you fall in that range.
The National Association of Realtors compiles data on homebuyers and sellers. Their research put the median down payment at 12% in 2020, and that number drops down to 7% for first-time homebuyers.
While it’s good to know what the landscape looks like for down payments, it’s more important to focus on your financial situation.
How Much Should I Put Down on my Mortgage?
Now equipped with an understanding of the major loan programs and the typical down payment amounts buyers are paying today, your next step is to narrow down how much you can and should put down for your home purchase.
Everyone’s down payment will look different, but you should consider these factors in your evaluation:
- A higher down payment equals a lower monthly payment. Your down payment lowers your loan principal and therefore lowers your monthly payments. If you can afford to pay more down now, you can lower your interest fees and total loan cost.
- If you put down less than 20%, you’ll probably be required to buy Private Mortgage Insurance (PMI). This is why you’ve probably heard it’s a good idea to put down at least 20%. We break this down in more detail in the next section of this post.
- Make sure you still have savings after covering your down payment and other closing costs. Homeownership comes with unexpected costs, so you don’t want to empty out your entire savings paying your down payment. Work with your loan officer and financial planner to evaluate how much you should keep saved for your homeownership journey.
What About That 20% Down Benchmark?
Many Americans think you need to have a 20% down payment saved up before shopping for a house. Being able to put 20% down will indeed open doors to better financing options and preferential rates, but it’s by no means a dealbreaker if you can only put down a smaller amount.
If you’re financing using a conventional loan, you will need to pay for Private Mortgage Insurance (PMI) if you’re putting down less than 20%. This insures the mortgage in case you default on your loan and helps protect the lender. There is good news though: You can remove the PMI once you reach 20% equity, meaning you’ve paid off 20% of the loan.
With this in mind, you can evaluate your finances and the cost of PMI and decide if it makes sense to move forward with a lower down payment, knowing you can cancel the PMI later on.
Your best resource for determining the most suitable loan program for your financial situation will be your loan officer. They are well-versed and stay up-to-date with the market trends and loan programs being offered.
Don’t hesitate to get started with one of our loan officers today. They will be glad to help you prepare to begin your homeownership journey.
The included content is intended for informational purposes only and should not be relied upon as professional advice. Additional terms and conditions apply. Not all applicants will qualify. Consult with a finance professional for tax advice or a mortgage professional to address your mortgage questions or concerns. This is an advertisement. Prepared 2/11/2021.