The down payment on a home and how much to put down is one of the most frequently asked questions I get as a loan officer. There is no single answer to this question because there are a number of loan programs available, and each comes with their own down payment requirements. So lets take a look at each of the loan programs to see if we can determine what is the average down payment on a house.
According to the National Association of Realtors and the 2020 Report “Profile of Home Buyers and Sellers” the average down payment in the U.S. for real estate purchases in the time frame covered in the report is 12%. Also, according to the report 87% of all buyers financed their home purchase while first time home buyers financed the highest percentage of their purchase with a 7% average down payment.
Is 20% Down Payment Required to Buy a Home?
For some reason many borrowers continue to believe that they need to save up 20% of their home purchase price as a down payment when purchasing a home. This is definitely not true and probably has something to do with private mortgage insurance (PMI) and how much equity you need to have in your home to remove the PMI on a Conventional loan. That number is 20% equity, but this has no relation to how much down payment you need to purchase a home.
There are plenty of mortgage loan options available for home buyers to buy a home without putting 20% down as a down payment. Saving for a down payment is the biggest obstacle to buying a home in the U.S. so having the knowledge that you don’t need to save 20% before you can buy a home might give more motivation to those in the process of saving.
The next step is to learn which mortgage loan option would be the best fit for you. Determining the best loan option for you means sitting down early on with your loan officer to review your financial profile to find out the best combination of credit score, debt to income ratio, and funds available to place you in the right loan program. A borrower’s financial profile will determine what programs you will be able to qualify for. Let’s take a look at some of these loan options and the minimum down payment required for each.
What is the Minimum Down Payment for a VA loan?
VA loans are no money down mortgage loans that are guaranteed by the federal government and are available through local banks and mortgage bankers.
If you’re an honorably discharged veteran, are currently serving on active duty or have completed a total of six years of service in the National Guard or selected reserves, you may be eligible for a VA loan. In addition, surviving spouses of veterans may also be eligible.
VA loans are one of the best loans available to qualified home buyers because no money is required for a down payment, the interest rates are some of the most competitive offered, there is no mortgage insurance required, and these loans are very credit friendly for those that have past credit events on their credit report. This would be one of my first loan choices for those that have VA loan eligibility.
What is the Minimum Down Payment for an FHA Loan?
FHA mortgage loans are home loans insured by the Federal Housing Administration, a government agency within the U.S. Department of Housing and Urban Development. FHA loans require only a 3.5% down payment and borrowers with a credit score of as low as 580 may qualify to buy a home using an FHA loan. FHA loans are also known to be very credit friendly to those with prior credit events on their credit report.
For these reasons, the FHA mortgage loan program has been a big boost for first time homebuyers trying to buy a home. The standard mortgage qualification requirements are still there, but the thresholds for loan approvals are generally less stringent and more flexible.
The 3.5% down payment requirement is very reasonable, and another nice feature of the FHA loan program is that there is flexibility in the allowable debt-to-income ratio (DTI). This means that if your debt-to-income ratio is higher than the normal allowable level of 45%, an FHA loan may be your best option because in many cases a borrower using an FHA loan can have a DTI that is higher than 45% and still receive a loan approval. This will be on a case-by-case basis so it is best to work with your lender to see how your specific situation measures up.
To learn more about FHA loans and the requirements to get an FHA mortgage pre-approval, please read our detailed article here.
What is the Minimum Down Payment for Conventional Loan?
The standard down payment required to qualify for a Conventional loan is 5%. And most Conventional purchase loans that are made to home buyers use the traditional 5% down payment loan option.
However, there is an additional loan option available for those hoping to use a Conventional loan and that is a 3% down mortgage loan for first time home buyers. Saving for a down payment is often the biggest hurdle to buying a home, so this 3% down loan option places the dream of homeownership within reach of many more buyers than was possible before the program was created.
The other main requirements are the home must be a primary residence and the property must be a single unit property, no multi-family properties are allowed.
What are some of the Costs to Expect on a Mortgage Loan?
When buying a home you can expect to be responsible for two types of mortgage costs on your purchase. The first cost is the down payment which we discussed in detail earlier in this article and the second cost is closing costs. Both of these costs will be collected at closing by the title company so this should be part of your budget as a home buyer and you as a buyer should have funds ready for both the down payment and closing costs.
How much will closing costs be? This varies by state so it is best to check with your lender to get a quote for closing costs in your area.
Another consideration for home buyers to take in to account when buying a home is making sure to budget for private mortgage insurance (PMI) when calculating your monthly mortgage payment. A monthly mortgage payment will normally consist of four items wrapped in to the payment, principal + interest + property taxes + homeowners insurance, also known as PITI.
When making a down payment of less than 20%, you need to budget for private mortgage insurance (PMI) to be added to the monthly mortgage payment. Your loan officer will calculate this amount when he/she sets up your loan and has all of the relevant information added to your loan file such as the credit report, income, two-year job history, and two-year residence history.
While the private mortgage insurance (PMI) is a cost that needs to be accounted for in the monthly mortgage payment, home buyers should remember that on a conventional loan, the private mortgage insurance can be removed when the homeowner has 20% equity in the home.
Homeowners can reach this milestone either by paying down their mortgage balance down to the 20% level, or having the home increase in value to the point where you reach the 20% threshold of equity ownership. Normally this happens through a combination of both paying down the mortgage and property value appreciation. With property values rising rapidly in the last several years in many cities around the U.S. the amount of equity that homeowners are sitting on is at record levels.
There are many low down payment options available to home buyers hoping to buy a home. If you have any questions at all about the loan programs we talked about in this article, or any other mortgage related questions, please reach out to me anytime and I would be happy to assist with answers to your questions.
In addition to the programs mentioned above, there are also options to buy a house with no money down. To learn more about these options, read our article here.
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