What Is The Minimum Down Payment For A House Loan?
Miranda Crace5-Minute Read
April 20, 2021
As a home buyer, you have many decisions to make when purchasing a home – whether it’s your first or last. One of the first steps in the home buying process is to determine how much money you will need to have saved up for your down payment.
While lenders may have once required higher down payments to be made, today these rates can vary significantly depending on what type of loan you are using and your individual budget. Some loans may not even require any down payment to be made.
To help clarify the different loan requirements, we’ve put together this guide on what the minimum down payment needed for each loan type is.
What Is A Down Payment?
Before you start to calculate the minimum down payment you’ll be required to make on your loan, it’s important to have a good understanding as to what a down payment is and how it works. Making your down payment is an important step in the home buying process. This payment determines how much money you need to borrow and what your monthly payments will look like.
A down payment is a cash payment that you make upfront on a large purchase. For the purchase of a home, this payment is calculated based on a percentage of the sale price that is feasible for you to make. Once this has been calculated, your lender will assess what the remaining amount needed to buy the property is and provide you with this in the form of a loan that best fits your needs. It’s important to note that you’re responsible for paying the down payment at the time of closing.
The Difference In Down Payments For Each Type Of Home Loan
The amount that you are required to put down on a house will vary depending on which type of loan you choose. Although most traditional loans require a down payment, there are a few loans that do not require home buyers to put anything down. Let’s take a look at the different types of home loans and their down payment requirements.
A conventional loan is one of the more common mortgage loans that follows the guidelines of Fannie Mae and Freddie Mac. Conventional loans often require higher down payment contributions than other loan types. However, the amount you are required to put down will depend largely on your credit score and lender. If your credit score falls below a certain threshold, your lender may require you to put more than the minimum 3% down. Some lenders even have a 5% minimum imposed for their own standards.
A Federal Housing Administration (FHA) loan is one that is backed by the government. This type of loan is common among first-time home buyers and only requires the borrower to put a minimum of 3.5% down at closing. For those with a lower credit score, however, this percentage could be slightly higher. Because these loans have fewer requirements for borrowers to meet than traditional loans, they are often an attractive option for home buyers who may not be able to put a large payment down.
United States Department of Veterans Affairs (VA) loans are available to eligible veterans, members of the Armed Forces and National Guard and surviving spouses. For individuals who qualify, these loans allow a 0% down purchase of a new home. These loans usually requires a funding fee to support the program and mitigate any potential risk on the lender.
A United States Department of Agriculture (USDA) loan is available to buyers who are purchasing a home in a qualified suburban or rural area. Like VA loans, USDA loans do not have down payment requirements. They may also require additional fees or mortgage insurance. To qualify for these loans, it is required that your prospective home meet the USDA’s standard guidelines of an eligible home.
A Jumbo loan exceeds the limits of Fannie Mae and Freddie Mac, and is typically used for high-cost home sales. Because of this, many lenders consider these types of loans to carry higher risk, so they may require a larger down payment to be made. This typically ranges from 10% to 20% of the overall cost to be put down upfront in cash or other assets to avoid any future risk.
Should You Put More Down?
There is a common misconception that a 20% down payment is required to buy a house. While most lenders do not have these requirements anymore, it also varies greatly on what type of loan you choose. As discussed above, the minimum down payment for a mortgage can range from 0% to 20% with VA and USDA loans requiring the least amount of down payment on a house.
During the mortgage process, home buyers often wonder whether or not they should be putting more down at closing than just the minimum. With the rising cost of homes, putting more money down is not always feasible. It all depends, of course, on your personal financial situation as a buyer.
The most important thing to remember is that you should only put down as much as you can realistically afford to. If you are able to put more down, this could play to your advantage by lowering your monthly payments. However, depleting your entire savings account to put a higher payment down could make it difficult to continue paying for your other expenses. It’s important to consider all other monthly bills and the associated closing costs of the home into this decision. Having extra money in your savings account is also important in case any emergencies or unexpected job losses occur.
Consider How This Affects Your Mortgage
If you can afford more than the minimum down payment for a house at the time of closing, it could be useful for lowering your monthly mortgage payments. Here are some of the ways that increasing your down payment could affect your monthly mortgage payments.
In general, the more you put down upfront on a house, the smaller your payments will be each month. The most significant benefit in this is the reduction in interest rates. When you reduce the overall value you need to borrow, you could potentially save thousands of dollars in the long run on both the principal and interest. To test this, use our free mortgage calculator to see the impact a larger down payment can have on your monthly mortgage payments.
Private Mortgage Insurance (PMI)
The reason why 20% is considered to be an ideal down payment amount is because any amount over that percentage helps a borrower avoid having to pay private mortgage insurance (PMI) and lowers their overall monthly payments. PMI is used to protect lenders in case a borrower defaults on their mortgage. With PMI, a lender is able to recoup some or all of their loss. PMI is only required for borrowers who are putting down less than 20% of the purchase price.
Loan-To-Value (LTV) Ratio
Lenders use a loan-to-value (LTV) ratio to calculate risk and price your mortgage fairly. This is calculated by looking at your home’s appraisal value and your initial equity in the home. When you make a larger down payment, your LTV decreases and you start with a greater equity. This can help signal to lenders that you’re a low-risk borrower. In turn, this classification may help you receive a better interest rate and avoid additional costs.
The Bottom Line
There is no set rule as to how much you should be putting down on a house. When making your decision, it’s important to consider your financial situation and how much you can realistically afford to put down.
Depending on which loan you are using, your down payment can vary significantly. This is because each type of home loan has its own set of eligibility and minimum down payment requirements. Although those percentages serve as a gauge for the lowest amount that you can put down on a home, you may want to consider how an increased down payment can benefit you in the long run.
To learn more about applying for a mortgage that fits your needs and budget, check out our home buying resources.
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