If you're looking to buy a home, you'll have to think about how much you can afford to put up as a down payment. A down payment may or may not be required depending upon the type of mortgage you can obtain, although the average deposit on a house in the U.S. is about 6 percent.
TL;DR (Too Long; Didn't Read)
When it comes to mortgage down payments, generally, you'll need at least 3 percent for a conventional loan and at least 3.5 percent for an FHA loan. If you qualify for a VA loan, no down payment is required.
Defining Deposit on a Mortgage
A deposit can mean a down payment or it can mean an earnest money deposit. Most home purchases financed by a mortgage loan will need a down payment, but not all home purchases will involve an earnest money deposit.
Earnest Money Deposit Vs. Down Payment
An earnest money deposit is an escrow deposit a potential buyer makes to the seller as a way of showing good faith before closing, usually around 1 to 3 percent of the purchase price. If the sale goes through, the money is a credit to the buyer. If the sale falls apart, the seller typically keeps the deposit.
A down payment, on the other hand, is simply the buyer's money that he puts toward the purchase of the house. The down payment reduces the amount of the loan the buyer needs.
Why Pay a Down Payment?
Mortgage lenders require down payments because they don't want their loan balances to be too close to the value of the house. Down payments create equity cushions, which create security for the lender. On the buyer side, a down payment can reduce the monthly payment owed on the mortgage because you don't need to borrow as much to buy the house if you pay for some of it upfront.
Conventional Loan – Required Minimum Deposit
A conventional loan is not guaranteed by the government in any way. Because of that, most conventional loans are available only to people with credit scores of at least 680.
Conventional loans generally require at least 3 percent of the purchase price as a down payment. However, if you put down less than 20 percent, you'll have to pay private mortgage insurance, or PMI, until the balance of your loan gets paid down below 80 percent of the home's value.
PMI is calculated based upon your creditworthiness; a person with better credit will have a lower percentage of PMI to pay than a person with less than stellar scores.
FHA Loan – Required Minimum Deposit
FHA loans are loans that are guaranteed by the federal government through the Federal Housing Administration. FHA loans require at least 3.5 percent down and also require payment of mortgage insurance no matter how high the down payment is. In fact, the buyer must pay a 1.75 percent fee upfront at closing and then pay anywhere from 0.45 to 1.05 percent per month extra on top of interest.
However, FHA loans are available to those with credit scores as low as 500, but if your score is 579 or lower, you must put down at least 10 percent.
VA Loan – Required Minimum Deposit
VA loans are loans that are also federally guaranteed, but by the U.S. Department of Veterans Affairs. These are available to U.S. military veterans or active-duty service members (there are some caveats, and you should check with the VA to see if you qualify). VA loans require no down payment whatsoever.
Like FHA loans, however, VA loans require the borrower to pay a funding fee unless she meets certain disability requirements. The funding fee will vary, but it will be higher if this is your second VA loan and you're not making a down payment. It will also be higher if you're a reservist or if you're in the National Guard.
- Realtor.com: Earnest Money Deposit vs. Down Payment: What's the Difference?
- Bankrate: FHA loans: Everything You Need to Know in 2019
- U.S. Department of Veterans' Affairs: Ten Things Most Veterans Don’t Know about VA Home Loans
- U.S. Department of Veterans' Affairs: VA Home Loans
- My Mortgage Insider: Buy a House in 2019 with a Conventional Loan
- Fortunly: 20+ Must-Know Mortgage Statistics in 2019
- U.S. Department of Veterans' Affairs: Certificate of Eligibility
Rebecca K. McDowell is an attorney focusing on creditor and debtor law. She has a B.A. in English and a J.D.