Many people still think you need a 20 percent down payment to buy a house. However, many borrowers are able to buy homes with little or no down payment. There are loans and programs in every state to help people become homeowners, even if they haven’t saved a 20 percent down payment.
“I’ve been in this business for 30 years. Having 20 percent down is just one of those myths about lending that is out there,” says Jill Hoogendyk, branch manager and mortgage expert at Prospect Mortgage, Phoenix. “Things are always changing. The only reason people usually put down 20 percent is to get out of private mortgage insurance. But we’ve always had loans with 5 percent down.”
Average Down Payment
Despite the myth that you need a 20 percent down payment, the average American becomes a homeowner with a down payment that is just six percent of the loan amount.
Down payments can be a very personal decision. The size of your down payment will be determined by your financial situation, including whether you want to pay a lower monthly payment, avoid private mortgage insurance, or finish paying for your house quicker.
Minimum Down Payment By Loan Program
Here is a look at the down payment options for each type of mortgage:
You can get a mortgage through a lender that approves loans based on Fannie Mae and Freddie Mac rules – which is most lenders – with as little as 3 percent down. You must have a credit score of at least 620 and offer complete documentation of your funds, job, assets and credit history. By getting a conventional loan, you can avoid the higher-priced FHA loan mortgage insurance which continues the entire length of the loan. With a conventional mortgage, the mortgage insurance premiums stop once the borrower has accumulated 20 percent equity.
Three percent down payment conventional loans are out there. The down payment can be a gift from a relative or a community mortgage program.
“Just remember that the less you put down, the more you will be paying and the higher the interest rate. Conventional loans are very credit score-driven. A 3 percent conventional loan will have much more rigid standards than FHA standards,” she says.
With any mortgage, including a conventional loan, you will run into other expenses that add up to the price of buying a new home. The addition of closing costs, the appraisal, the credit report cost, the first year of insurance, taxes and inspection will cost about 2 percent of the entire purchase price. A conventional loan appraisal will run about $470 in her area, while an FHA appraisal which has a few more requirements, is $490. A home inspection which includes pest inspection can run from $350 to $450.
FHA Loan Down Payments
The Federal Housing Administration (FHA) backs loans with a down payment amount of as little as 3.5 percent. For an FHA mortgage, that money can be gifted, too, by a relative or through a down payment assistance program. An FHA mortgage loan is insured by the federal government, but not offered directly by the government. Instead, FHA-approved lenders offer loans based on FHA rules.
FHA mortgages have loan limits depending on where you live in the country. Additionally, FHA loans require a one-time upfront mortgage insurance fee plus mortgage insurance throughout the length of the loan or until the borrower refinances. The upfront fee can be financed into the loan.
VA Home Loan Down Payment Requirements
This is a zero down payment mortgage, with loan limits based on geographic area, just like the FHA loans. These loans are guaranteed by the Department of Veterans Affairs and borrower eligibility is based on their military service. This loan program is an excellent home buying option for qualifying borrowers since, in addition to no minimum down payment requirement, it offers lower interest rates and no mortgage insurance.
“This is a wonderful loan. People should use it and pay zero down, and use their money for something else like investments,” she says. “Many service people don’t even use their VA benefits. You can even get a VA loan even if you have a 55 percent debt-to-income ratio.”
VA rules state that veterans do not pay certain closing costs such as escrow fees.
These loans allow 100 percent financing with no down payment through the Rural Development U.S. Department of Agriculture. The house you want to buy must be within an area designated in the program. Some of the eligible USDA loan houses are in subdivisions of big cities, too.
The program is income-driven, meaning you can’t make more than 115 percent of the median income in your household. This type of loan also allows for a gift down payment.
Down Payment Assistance & First-Time Homebuyer Programs
A recent analysis by the Down Payment Resource and RealtyTrac found 87 percent of the single-family homes and condos in the U.S. would qualify for a down payment assistance program. The average amount of down payment assistance across all counties is $11,565. More than 2,000 counties have more than 10 down payment programs available to prospective homebuyers.
If this is your first mortgage — or you haven’t had a mortgage in three years or more — then you may qualify for one of the hundreds of housing and community development nonprofits working to help people become homeowners.
Ready to become a homeowner?
Don’t let saving for a 20 percent down payment delay homeownership. A mortgage calculator can help you to understand how different down payment amounts will shape your monthly mortgage payment and speaking with a mortgage lender can help you to find the right mortgage program for you.