February 28th, 2019
“A down payment is money you pay that isn’t financed through a mortgage,” says attorney William Walzer. “It is typically paid at closing to the home seller.”
Together with the home loan, the down payment equals the total sales price for the home being bought. Say your home’s sales price is $300,000. If your required down payment is $60,000, you’ll need to borrow $240,000 ($300,000-$60,000).
“The buyer will provide the down payment amount to the settlement agent or closing attorney a few days before the closing date,” says Carlos Miramontez with Orange County’s Credit Union.
A recent National Association of Realtors survey found some surprising results:
There are mortgage programs for all types of down payments.
The down payment amount you must pay depends on the loan you get. Fannie Mae and Freddie Mac offer loans with down payment requirements as low as 3 percent. In general, the less you put down, the pickier conventional (non-government) lenders become about the rest of your credit and income.
Benjamin Feldman with Unison Home Ownership Investors explains, “That’s because the loan carries greater risk of default as the down payment gets smaller. Because of this risk, buyers must usually pay private mortgage insurance (PMI) if the down payment is below 20 percent.”
There’s good news: three types of loans require little-to-no down payment:
These government programs do require some form of insurance as well. For FHA and USDA loans, it’s MIP (mortgage insurance premium), For VA home loans, it’s a funding fee. You can usually add those charges to your loan amount.
The question of how much down payment do you need for a house really depends on other factors in your application. If your credit is perfect, your income is solid, and you have little debt, you can pay less.
For instance, FHA allows a 3.5 percent down payment if your credit score is at least 580 (and everything else is perfect with a score that low), but requires at least 10 percent down if your FICO score is between 500 and 579 (and everything else had still better be perfect because 500 is a very low score).
Just because you can buy with little or no money down doesn’t mean you should.
“When you put more money down, it means you’ll start off with more equity in your home. That means you’ll have lower payments, too,” says Feldman. In addition, mortgage insurance costs less if you make a larger down payment, also reducing your monthly costs.
But you might be better off buying sooner with less money down. Do you qualify for a low or no down payment loan? Then you may want to buy sooner. That’s because housing prices and interest rates may go up the longer you wait. And you don’t want to clean out your emergency savings for your down payment.
“A year from now, a home you’re considering buying may cost more. And it may require a larger loan amount at a higher interest rate,” says Miramontez.
To help you reach the finish line and save enough for a down payment, follow these tips:
Saving for a down payment also lets you “practice” for homeownership. For instance, if your rent is $1,000 a month, and your new mortgage with taxes and insurance would be $1,500 a month, spend a few months adding $500 a month to your savings and see if your lifestyle can take the hit. Or pay off enough debt to reduce other payments by $500.
You’ll get used to spending less on other things, or you’ll find out the easy way that it won’t work. (Finding out via foreclosure is the hard way.)
In any event, the size of your down payment is a personal decision. Run the numbers, practice the payments, and make the best decision for your own goals.