Down payments are one part of a home purchase that leave many buyers with questions. Saving up a large chunk of cash can be the most difficult part of buying property, but it is necessary in many cases to get the loan you need. The amount you will have to put down on your new home may vary by loan type or amount, but there are industry standards that can prepare you for what to expect.
Depending on the lender, the amount of the mortgage in question and your financial qualifications, lenders typically require anywhere from a 5 to 20 percent down payment to approve a loan. FHA loans made through the Department of Housing and Urban Development require only 3.5 percent down and are meant for buyers with low income, bad credit or those who cannot manage to raise more cash up front. The industry standard for mortgages and the number that all buyers should aim for when considering a home purchase is 20 percent. If you put down any amount less than this with a conventional mortgage, or one that doesn't have government backing, you will have to pay for private mortgage insurance to protect your lender from default.
No Money Down
If you are a veteran of the armed services, the Department of Veterans Affairs has a series of loans available that require no down payment at all. The loans have a cap of $417,000 (as of August 2012) and allow for the full purchase price of the home or property to be financed. Although your monthly mortgage payments will certainly be higher without a down payment, the upfront savings can be huge. If you purchase a home at $400,000, the 20 percent down payment amount would be $80,000. This is a number that can prevent many prospective homeowners from moving ahead with the purchase.
If you qualify for a government-backed Federal Housing Authority loan, you may be able to secure a loan that requires a smaller down payment. FHA loans are insured by the federal government so that private lenders are not at risk if the borrower should default. FHA loans are available to borrowers with credit scores of at least 580 and require a minimum down payment amount of 3.5 percent. If your score is lower than 580 you can expect to need 10 percent down. FHA loan terms and limits vary by county and can be referenced with the U.S. Department of Housing and Urban Development online FHA Mortgage Limits calculator.
Buying More House
Some home buyers look at the down payment as a way of getting more house for their money without increasing their mortgage amount. If the monthly payments for a house cost more than you can comfortably afford, but you have enough cash to make a large down payment, the amount you need to borrow is reduced and the payments instantly become more affordable. While this method can get you into the house you want, it can also require that you spend your nest egg in the process.
Down Payment Leverage
If you have less-than-perfect credit, the down payment may be one way to secure the home loan you need anyway. Lenders are more likely to approve a borrower who is willing to put down more than is necessary for the loan. It displays a real desire to purchase the property, increases your stake in the transaction and reduces the principal of the loan so the bank is lending less money and you are liable for a smaller payment each month. As a rule, the larger the down payment, the easier the approval process and the less stringent the lender's investigation into your finances.
- The New York Times: What’s a Reasonable Home Down Payment?
- Realtor.com: Do I Have To Have A Down Payment To Purchase A House Or Condo? Read more: Do I Have To Have A Down Payment To Purchase A House Or Condo? | REALTOR.com® Blogs
- Realtor.com: Down Payment
- AOL Real Estate: How Much Down Payment Do You Need?
- U.S. Department of Housing and Urban Development: Common Questions from First Time Home Buyers
- CNN Money: Tips for Buying a House
- Newsday: How to Tell When an FHA Loan is Right for You
Robert Morello has an extensive travel, marketing and business background. He graduated with a Bachelor of Arts from Columbia University in 2002 and has worked in travel as a guide, corporate senior marketing and product manager and travel consultant/expert. Morello is a professional writer and adjunct professor of travel and tourism.