How much do you need to put down on a house? If you think the answer to that question is at least 20 percent, think again. As Arch MI’s Insights reports, despite the fact that 49 percent of Americans think a 20-percent down payment is a must, nearly 60 percent of first-time homebuyers make a down payment of 19 percent or less. In fact, more than a third buy their first home with a down payment of less than 10 percent. Clearly, a 20-percent down payment is not a necessity – but what is?
How Much Do You Need to Put Down on a House?
Saving enough money to make a sizable down payment can be incredibly difficult for many Americans. Fortunately, it’s not necessary. There are several home loan programs that make it possible to jump into homeownership with little or no down payment. Understanding your options and their respective pros and cons can help you determine the right down payment for your situation.
Common Down Payment Requirements
When you’re searching for a home loan, you’ll find a wide range of loan programs available. Talking with a knowledgeable loan officer can help you explore the possibilities and learn which ones might fit your needs. Each loan program comes with its own rules, including its own down payment requirements. How much do you need to put down on a house? Credit.com offers a list of the minimum down payment requirements for some popular home loan programs:
- With a VA loan, your down payment can be as low as 0 percent.
- With a USDA loan, your down payment can be as low as 0 percent.
- With an FHA loan, your down payment can be as low as 3.5 percent.
- With a conventional loan, your down payment can be as low as 5 percent.
- With a conventional loan without private mortgage insurance, your down payment can be as low as 20 percent.
The Benefits of Putting Down 20 Percent
If you can buy a home with little or no down payment, why do some people opt to put down 20 percent? As NerdWallet reports, making a home purchase with a down payment of 20 percent or more offers several benefits:
- A large down payment can help you compete in a tight market because it suggests to sellers that your finances are in good shape.
- When using a conventional mortgage, you can eliminate the need to pay for private mortgage insurance by putting down at least 20 percent. This can result in substantial savings.
- Because a sizeable down payment reduces their risk, lenders tend to offer more favorable terms to buyers who are making a larger down payment. As a result, these buyers often face lower upfront costs.
- Lenders also tend to offer buyers making a larger down payment a lower interest rate. This ultimately reduces both the monthly mortgage payment and the total cost of the loan.
- Making a sizable down payment allows you to jumpstart the process of building equity.
The Disadvantages of a Large Down Payment
Is bigger always better when it comes to down payments? Before jumping to that conclusion, it’s worth taking some time to consider the opposing point of view. As The Mortgage Reports indicates, there are some potential disadvantages of making a large down payment:
- A large down payment can tie up a lot of your cash, making it difficult to respond quickly to a financial emergency. It also limits your ability to participate in potentially more lucrative investments.
- A large down payment generally results in a smaller rate of return on your investment, as your home’s value increases over time.
- A large down payment can make an economic downturn that negatively impacts your home’s value more devastating.
Deciding on a Down Payment
If there are pros and cons to down payments large and small, how do you decide how much of a down payment to make? The Street recommends that you think carefully about factors like your financial situation, income, credit health, age, marital status, and savings. It’s also wise to consider your future plans and your investment style. Then, spend some time playing with an online mortgage down payment calculator to understand how various down payments affect your options.
How much do you need to put down on a house? What impact does your down payment have on your purchasing power? Will the size of your down payment limit your loan options? If you have questions about down payments and other home financing topics, PrimeLending of Springfield, Missouri, has clear, honest answers that can help you move toward your housing goals with confidence. Contact us today to learn more about how we can help you secure your next home.