Think you're ready to buy a house? You may be wondering how much money you should put down. Your down payment on a house can vary significantly depending on a number of factors, like the price of the house you want to purchase, your debt-to-income ratio, and the type of loan you get.
For standard mortgages, you'll be expected to put at least 3%-5% down as a minimum, but it's encouraged to make a down payment of 10%-20%. For FHA loans, you can put as little as 3.5% down. For VA loans which are guaranteed by the Department of Veteran Affairs, you can obtain a mortgage with 0% down. Those are down payment minimums and expectations for just a few types of mortgages, but there are other options as well.
With all of the lending options available, you have lots of flexibility when it comes to determining what your down payment will be.
What is the Standard Down Payment?
With so many different mortgage and down payment options, it's hard to determine what the standard down payment is. Traditionally, it's common to hear that you should put down at least 20% of the purchase price.
In many cases, putting down at least 20% can help you avoid paying private mortgage insurance and will help you gain some equity in your home right off the bat.
However, in today's innovative lending market, there's really no standard down payment. There are plenty of options to choose from so you can settle on a down payment that meets your needs.
Getting in a Home For Less
As outlined above in some of the down payment examples from different mortgage loans, you can buy a home with little to no money down. If you live in an expensive housing market, for example, and can't afford to put 20% or even 10% down, you can still become a homeowner with much less.
If a 20% down payment means you need to come up with $45,000, it could take you a while to come up with that money plus closing costs and other moving expenses. When buying a home, you don't want to deplete your savings entirely so you can still be able to afford unexpected expenses in other areas of your budget.
For starters, you could be expected to pay a higher interest rate if you put less down. In addition, putting up a smaller down payment could cause you to pay private mortgage insurance (PMI) which can add to your monthly mortgage payment each month, increasing the amount of money you need to pay on your loan over time.
For some loans, you can get rid of PMI years later, but it's still extra money spent that could be avoided if you make a larger down payment.
Another drawback of putting a smaller amount or no money down on your home is that you won't have much equity in it from the start. If the value of your home decreases, you could be underwater on your mortgage. Or, if you need money to make repairs, you'll be less likely to qualify for a home equity loan.
Calculating the Economics
When it comes to deciding how much money you'll put down for a new home, doing the math and running the numbers first is the best way to go. While mortgage rates depend on your credit score, they also depend on how much you put down. If you put down less money, you are more likely to receive a higher interest rate on your loan. The rate may not be significantly higher, but it's something to keep in mind because it can cause you to spend more on your mortgage over time.
There's also PMI to consider when you put down a small down payment. PMI varies depending on the home and the area, so be sure to calculate how much extra PMI will cost you per month if you expect to pay it.
Then, consider how much money you would spend if you put 20% down and obtained a standard mortgage. You wouldn't have to pay PMI, so calculate how much you would actually be saving. Plus, see if there's a noticeable difference in the interest rate you'd qualify for by testing out different down payment amounts.
Carefully weigh the pros and cons when it comes to running the numbers for putting less down for your mortgage vs. putting up a larger down payment.
Compare Mortgage Loans and Down Payments
Comparing mortgage loans and down payment requirements and guidelines can also help you determine what you want your down payment on a house to be and what type of loan you'd like to apply for.
You can compare multiple mortgage loan terms and offers online without getting your credit ran and explore your options when it comes to low down payment loans. Assessing your current situation, doing your research, and running the numbers will ultimately help you make a final decision as to how much money you'd be comfortable contributing for a down payment on a house.