If you're considering buying a home, you might be wondering: how much is a down payment for a house?
For many people, figuring out what they can afford starts with budgeting for the down payment. This is typically the most significant upfront expense involved in purchasing a home. If you've searched online for "how much for a house down payment" or "what is required for a down payment," you might have seen that the general rule is that the down payment is 20% of a home's purchase price – but that isn't always the case.
Many factors can affect your down payment amount, including the type of loan, your lender, your financial goals, and more. Although there are benefits to putting down 20% or more, that traditional number may not be required in your case, especially if you're a first-time homebuyer.
In this guide, you'll learn everything you need to know about down payments for buying a home, including:
- What is a down payment?
- How much money is required for a down payment?
- Can I put down less than 20% for my down payment?
For many prospective homebuyers, learning more about down payments means discovering that buying a home is within reach far sooner than they might think.
What Is a Down Payment for a Home?
A down payment is a payment made upfront when buying a house. This is the amount you pay out of pocket either from your savings or from eligible gifts.
Down payments aim to protect both the buyer and the bank. In the event of a foreclosure, the down payment provides the bank with a certain amount of equity in the property, allowing them to recover their loss better. For the buyer, a down payment ensures that, should the market decline, you have enough equity in your home to sell and break even (or even make a profit).
Down payments are almost always a standard part of the home buying process, but there are exceptions.
Minimum Down Payment Requirements
In the past, it had been said that a 20% down payment is required to purchase a home. However, that is not accurate, especially nowadays. Depending on the type of loan you're applying for, your required down payment can be anywhere from 0% to 3, 3.5, or 10%.
Benefits of a Larger Down Payment
It is possible to buy a home without a significant upfront cost. However, if you can make a down payment of 20%, or close to it, there are potential benefits:
- A lower mortgage interest rate: In the eyes of a lender, a larger down payment makes you less of a "risk." And with that often comes a reward in the form of a lower interest rate.
- More equity in your home from the start: Home equity is your home's value minus the total amount you owe on the mortgage. So, a larger down payment means you have more equity (or wealth).
- A lower monthly mortgage payment: If your down payment translates to a lower interest rate and a lowered principal, you'll be borrowing less - and your monthly payment will be lower. Plus, you won't need to pay monthly premiums on private mortgage insurance (more on that later).
- Lower upfront and/or ongoing fees: There are many benefits to low- or no-down-payment loans, but one downside is that they often come with added fees or ongoing costs. If you can secure a conventional loan with a larger down payment, you may be able to save more money in the long run.
How Much Down Payment Is Required?
Generally, a conventional mortgage requires that you put down 20% or pay for private mortgage insurance (PMI). This is a monthly payment that will be added to your mortgage payment and typically equates to 1% of your loan value per year.
How Much Should You Put Down on a House?
The ideal down payment depends on several factors, including your financial situation. Remember that you don't want to end up "house poor" by overspending your savings just to make a sizeable down payment. If you are unsure how much of a down payment to put down, your realtor or mortgage agent can help.
Why You Should Save for More Than Your Down Payment
It's essential to be aware that you will also need to be prepared to pay for closing costs in addition to a down payment. Usually, these equal about 2 to 5% of a home's purchase price and are due at closing. Also, you may need to have savings set aside for home repairs, moving costs, and other expenses that may come up at or soon after move-in.
Types of Low Down Payment Mortgage Options
Even though many mortgage lenders recommend a down payment of at least 20%, there are loan types for buyers that cannot put down that much. Low down payment loans are available, and you can weigh the pros and cons of each before making your decision.
1. Conventional Mortgage
You may be surprised to know that you can get a conventional loan without putting down a full 20% – ultimately, it usually depends on your lender. Some lenders offer conventional loans as low as 3 to 5% for down payments. Your interest rate will depend on whether you have a fixed-rate or adjustable-rate mortgage.
If you put down less than 20% for a conventional loan, you should be prepared to pay for private mortgage insurance (PMI).
2. Federal Housing Administration (FHA) Loan
An FHA loan is provided through the federal government and can be an ideal option for first-time homebuyers – especially those in need of a low down payment option. With an FHA loan, down payments can be as low as 3.5% of the purchase price.
Much like a conventional loan, FHA loans with loan down payments will generally require that you pay for mortgage insurance. One key difference is that you may have to pay an upfront amount and a monthly premium for the mortgage insurance.
3. VA loan
VA loans are available only for active-duty servicemembers and U.S. military veterans and are funded through a lender and backed by the Department of Veterans Affairs. If you qualify for a VA loan, you may not need a down payment.
Next Steps: Talk to the Real Estate Experts at Chatham Homes Realty
Whether you're a first-time homebuyer or fairly experienced, navigating the search for a home can be overwhelming. But with a trusted expert by your side, you can be confident that you are making the right decisions for your future and your family.
Chatham Homes Realty is a locally owned and operated realty team dedicated to serving buyers, sellers, and investors in North Carolina. With offices in Pittsboro and Siler City, you're never far from our professional residential, land, and eco-broker agents. Chatham Homes Realty is here to help you.
Contact our team today for more information about buying a home in North Carolina, including helpful details for first-time homebuyers.