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Knowing the necessary down payment amount is a crucial aspect of the home-buying journey. It helps you assess if you have enough funds to purchase a house and impacts your future monthly payments. To learn about the down payment prerequisites for various home loans, read this article.
Is a 20% down payment necessary when buying a house?
When purchasing a house, unless you plan on paying for it in full with cash, you will likely need to obtain a mortgage to finance it. Most mortgage loans require some form of down payment. It has been a common belief that a minimum of a 20% down payment is required or recommended. According to the National Association of Realtors, 35% of consumers believe that a down payment of 16%–20% is necessary.
This idea may have originated to help home buyers avoid private mortgage insurance (PMI), an additional monthly expense that protects the lender in case the homeowner defaults on payments. PMI is typically required if the down payment is less than 20%. However, paying 20% upfront can help you avoid this expense.
Nevertheless, a 20% down payment is not the absolute minimum required. There are mortgage loans available with lower down payment requirements, enabling you to purchase a home more quickly while possibly incurring PMI.
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What is the smallest sum of money required for a down payment?
The minimum amount needed for a down payment will depend on the type of home loan you intend to use. Each loan has different criteria, making it appropriate for various scenarios. Loan factors may include the loan term, fixed or variable payments, minimum down payment amount, credit score requirements, or home price.
Conventional loans
Conventional loans are a commonly chosen type of mortgage and are not affiliated with any particular government program. They come in two types: conforming, which adheres to government agency regulations, and non-conforming, which vary in eligibility, pricing, and features depending on the lender. These loans typically offer various term lengths and may have either a fixed or adjustable interest rate. At Ent, a minimum down payment of 3% is required for conventional loans.
Loans backed by the Federal Housing Administration
(FHA) are provided by private lenders, but their regulation and insurance are overseen by the FHA. These loans have their own eligibility requirements and can accommodate lower credit scores. Typically, borrowers are required to pay for private mortgage insurance (PMI) throughout the life of the loan. At Ent, the minimum down payment for FHA loans is 3.5%.
Veterans Affairs (VA) loans
VA loans are a type of loan program that the Department of Veterans Affairs provides to assist active-duty servicemembers, veterans, and qualifying surviving spouses in purchasing homes. These loans may offer more favorable terms and interest rates than other loan options, but individuals must obtain a certificate of eligibility from the VA in order to apply. Additionally, VA loans do not require borrowers to make a down payment.
Jumbo loans
Jumbo loans are a type of home loan designed for properties that exceed the price limits established by federal agencies. These limits can fluctuate each year and may differ depending on the state. Typically, these loans carry higher costs compared to conforming mortgages. At Ent, we offer fixed- or adjustable-rate jumbo loans with a minimum down payment requirement of 5%.
First-time home buyer (FTHB) loans
Loans for people buying their first home, commonly known as “first-time home buyer (FTHB) loans, can either be conforming or non-conforming. These loans are intended to assist new home buyers by reducing specific expenses and/or relaxing certain criteria. To be eligible for this loan, you usually have to be purchasing your first home. However, some programs consider a FTHB to be someone who has not owned or bought a home for three years or longer.
At Ent, we require a minimum down payment of 3% for our FTHB loan.
How will my down payment affect me?
Your down payment amount can have an impact on your loan and finances in the future, although this can vary depending on the type of loan and its specific requirements. It’s essential to consider the advantages and disadvantages of paying more than the minimum required amount so that you can select an appropriate down payment that suits your financial circumstances.
Making monthly payments
As discussed earlier, a larger down payment can help reduce your monthly payments in several ways. The more you put down, the less you need to borrow, resulting in a smaller loan amount.
If you can afford to put down more than 20%, you can avoid paying PMI, potentially saving you hundreds of dollars each month. However, keep in mind that not all loans require PMI (such as VA loans), and you may need to refinance to eliminate the PMI payment in some cases.
Using a mortgage calculator can help you understand how various down payment amounts can affect your monthly mortgage payment. Higher mortgage rates may have a more significant impact from a larger down payment, while a lower interest rate environment may allow you to make smaller down payments and use the saved funds for renovations or other financial goals.
What if I don’t have enough money for a sizable down payment?
Gathering enough funds for a down payment can prove challenging, particularly in areas with expensive real estate. It’s often considered one of the most difficult aspects of the home-buying process. If you’re struggling to come up with the necessary funds for a down payment, there are resources that might be able to assist you.
Check to see if you qualify for any federal, state, or county down payment assistance programs or grants. For instance, in Colorado, if you’re utilizing one of CHFA’s first-time homebuyer programs, you could potentially apply for a grant to help cover your down payment and/or closing costs.
If a family member has the financial means, they may be able to provide you with a gift to help you acquire funds for a down payment. Nevertheless, lenders may have different regulations regarding whether or not a gift can be utilized for a down payment, who can give the gift, and what kinds of mortgage loans it can be used for.
Consider consulting your lender if you intend to use a gift from a family member for a down payment, and inquire whether you require a signed statement or a gift letter to confirm that it was indeed a gift and not a loan.
There are numerous possibilities for down payments, and it should not prevent you from becoming a homeowner. Collaborate with your lender to explore potential assistance programs and determine if a loan alternative better fits your circumstances.