Down payment facts for home buyers are incredibly important; these aspects of buying and paying for a home may be glossed over in the planning stages during the initial excitement over potentially owning a home.
But once a first-time home buyer starts running the numbers and figuring out how much down might be required on a conventional or FHA mortgage, it’s a sure bet that if down payment help is available it will be used.
Do you know what it means to save for a down payment on a first home, a starter home, or even a replacement home?
Average Home Prices, Typical Down Payment Requirements
A 2019 Forbes report indicates that an average price for a new construction home circa December 2018 was just below $320 thousand. Consider what it means to put 20% down; that is the amount some borrowers might consider to be a typical down payment amount.
20% down is the amount you would have to pay on a conventional mortgage to avoid having to pay for Private Mortgage Insurance (PMI) on a conventional mortgage.
If the “20% approach” is taken, a home priced just below $320 thousand would require a down payment in the dollar amount just above $60 thousand.
But is 20% realistic? Can a borrower do better? The answer in many cases is yes.
How Much Can A Home Loan Down Payment Be?
In general, a down payment is required for most home loans except for certain government-backed mortgages like a VA loan or a USDA loan. VA mortgages have no VA-required down payment, and USDA loans are need-based and offer 100% financing.
For mortgages that require a down payment, the money down us usually calculated as a percentage of the adjusted value of the property. “Adjusted value” means the home must have an appraisal and that appraisal must reflect the current market trends for homes in a similar condition with similar features.
The actual percentage of the down payment will vary depending in a variety of factors including the type of mortgage you are applying for.
Why Pay 20% Down?
The 20% down payment number is a factor for conventional mortgages in cases where the borrower is willing to pay more upfront to eliminate private mortgage insurance. But not all conventional mortgages actually close with 20% down payments. Some decide to accept the PMI in order to pay a more reasonable amount down such as 5%
Five percent down on a home with the same price point we’ve been discussing (just under $320 k) would require a down payment of just over $15 thousand.
FHA Loan Down Payments
For FHA mortgages, the down payment requirement is only 3.5% for borrowers with qualifying FICO scores, and for those with low credit scores, a 10% down payment may be required. FHA credit score standards may be supplemented by additional lender standards, so it’s best to ask a loan officer about the down payment issue based on your most recent credit scores.
And just in case you’re wondering, yes, credit scores DO affect the amount of the down payment you may be required to make, and those same scores can affect the interest rate your lender offers you, too.
Deciding On Your Money Down
The type of home loan you apply for, your financial goals, and your financial needs as a home buyer will help determine what kind of down payment to make. If you plan to stay in the home long-term, and want to save money over the entire lifetime of the mortgage, a bigger down payment and a shorter loan term can help.
But if you need more money in your budget when it’s time to buy the home, more money down and a short loan term may not be as useful to you-those who need to save more money up front and can accept the trade-off of a loan that costs more over the long run will be more comfortable paying less up front for a down payment and rolling certain closing costs into the loan amount.
Talk to your loan officer about your financial needs and goals when trying to figure out how much money to put down.
Joe Wallace specializes in personal finance, military affairs, and consumer protection topics. Since 1995, his work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and collects unusual vinyl records, which gives him an excuse to write the vinyl blog Turntabling.net.