Down Payment on a House: How Much Should You Put Down?

Down payment on a house

If you’re a first-time homebuyer, one of the first things you think about is what you’ll need for a down payment. While a 20% down payment has been a standard for a long time, it’s not always necessary. When you decide on a down payment on a house, think about your goals and your financial situation.

What is a Down Payment on a House?

If you’re financing a home purchase, you’ll need an initial payment that secures the loan. Down payments are typically stated in terms of a percent of the purchase price of the home. For example, if you purchase a $250,000 home, a 20% down payment would be $50,000. When you subtract the down payment from the purchase price, you will finance $200,000, and your payments will be based on that amount.

The other thing to keep in mind is that there are closing costs when you get a mortgage. Some of those costs can include a credit report fee, appraisal origination fee, application fee, and title insurance, among others. Buyers typically pay in a range of 2-7% of the purchase price, with the average being around 3%. Therefore, on that $250,000 house, your closing costs could be in the range of $5,000 to $17,500, with the average being $7500.

The closing costs aren’t used as part of your down payment, but you need to plan for having the cash ready to pay those costs when you close on the sale. So, it doesn’t hurt to include those costs when you determine how much you need to save.

Do You Need 20% as a Down Payment on a House?

Traditionally, a 20% down payment is the standard, but it’s a home buying myth that you must have 20% to put down. Today, there are a number of different types of mortgage loans, and not all of them require a large down payment.

Conventional Loans

You get a conventional loan from your local banker, for example. Traditional lenders do use a 20% down payment as their preferred approach, but they can also accept down payments of as low as 3%. If you do get a conventional loan with less than 20% down, the lender will also require you to have Private Mortgage Insurance (PMI). The insurance premium will be added to your monthly mortgage payment.

Down payment on a houseGovernment-Backed Loans

Different departments in the government offer government-backed loans that have different requirements from conventional loans. Some of the most well-known include:

  • FHA Loans. The Federal Housing Administration (FHA) insures these loans. The down payment can be as low as 3.5%, and the credit requirements are relaxed.
  • VA Loans. These loans are insured by the Veteran’s Administration and are reserved for people who have served in the military. You can often get a VA Loan with no money down.
  • USDA Loans. These loans are intended to help low to middle-income homebuyers and are insured by the United States Department of Agriculture (USDA). The thing many people don’t know about USDA loans is that while the buyer must purchase a home in an approved suburban or rural area, but most of the U.S. qualifies. These loans typically offer low interest rates and flexible down payments.

First-Time Homebuyer Loans

First-time homebuyers can take advantage of loan programs made especially for them. Ask your local real estate agent and lender about the programs you may quality for. Examples include Fannie Mae’s Home Path Ready Buyer Program.

Consider Down Payment Assistance

You may be surprised to know that over 2,000 programs available nationwide that help homebuyers with their down payments. Some are grants and others are loans that you don’t need to pay back until you move, sell, or refinance your home.

Automate Your Savings for a Down Payment on a House

Saving for a down payment requires some discipline. For example, you can reduce the number of times you eat out, and spend $4 a day on a fancy coffee drink. It would be a good idea to create a budget and stick to it. But, there’s another strategy you can use to help your savings grow.

It’s very easy to overspend, but if you automate your savings plan, you’ll eliminate that possibility. Create a new account where you can set up automatic deposits every payday. Once you have put that money aside, you force yourself to live within your budget.

And, you can use an account where you’re not in danger of losing any of your savings, but you can get some interest or appreciation. These days, the interest rate is so low, you won’t get much, but when you’re saving for a down payment on a house, every little bit helps!

If you want to hire Realtors in Broward County, please consider the Teri Arbogast Real Estate Team. We specialize in working with first-time homebuyers.

Take a look at our Google reviews, and you’ll see that our clients have lots of good things to say. We’re very proud of our five-star ratings on Google, Zillow, and other real estate review websites. We’d love to make you our next successful client!  Call us at 954-242-8030 or send an email today.