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How much do you need for a down payment on a house?
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Understanding how much you may need for a down payment is an important part of the home-buying process. Your down payment amount not only can help you determine if you have enough money saved to purchase a house but can also affect your monthly payments going forward. Read this article to learn more about the down payment requirements for different home loans.
LESSON CONTENTS
The truths about down payments
At Ent, we understand that navigating the world of lending and homeownership can be a daunting task. One crucial aspect that often raises questions and misconceptions is the down payment. Whether you're a first-time homebuyer, considering a refinance, or looking to move up the property ladder, grasping the importance and options related to down payments is the key to realizing your homeownership dreams.
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Do I need a 20% down payment?
If you’re looking to buy a house, unless you plan on buying it in cash outright, you will most likely have to finance it with a mortgage. In simple terms, a mortgage is an agreement between you and a lender that allows you to borrow money to purchase a home. While there are different types of mortgage loans to choose from, many require some type of down payment.
Traditionally, we are used to hearing that if you want to buy a home, you need to (or should) put at least 20% down. According to the National Association of Realtors, 35% of consumers believe they would need between 16%-20% for a down payment1.
This notion may have become more commonplace to help home buyers avoid private mortgage insurance (PMI), an additional monthly expense that is put in place to protect the lender should the homeowner fall behind on payments. If someone puts less than 20% down, PMI is usually required as well. However, this expense can be avoided if you put 20% down.
However, while a 20% down payment can help you avoid PMI and lower your monthly payments, it is not the minimum required. Many people can find a loan that requires a much smaller down payment, which can help them get into a home more quickly.
What is the minimum down payment amount?
The minimum amount that is required will vary depending on the type of home loan you plan to use. Each loan will vary, making them suitable for different situations. Some of the loan factors may include loan term, fixed or adjustable payments, the minimum down payment amount, credit score requirements or home price.
Conventional loans
Conventional loans are one of the most popular mortgages and are not part of a specific government program. They can either be conforming (following rules set by government agencies) or non-conforming (eligibility, pricing and features varying by lender). These loans usually have a variety of term lengths and may have either fixed or adjustable interest rates.
At Ent, conventional loans require a 3% minimum down payment2.
Federal Housing Administration (FHA) loans
FHA loans are offered by private lenders but are regulated and insured by the FHA. These types of loans have their own qualification standards and allow for lower credit scores. These loans typically require PMI for the life of the loan.
At Ent, FHA loans require a minimum down payment of 3.5%.
Veterans Affairs (VA) loans
VA loans are a loan program offered by the Department of Veterans Affairs to help servicemembers, veterans and eligible surviving spouses to buy homes. These loans may have better terms and rates than other loans but require a certificate of eligibility from the VA to apply. VA loans do not require a down payment.
Jumbo loans
Jumbo mortgages are home loans for homes that fall above price limits set by federal agencies. The limits can change annually and may vary by state. These types of loans may have a higher cost than other conforming mortgages.
At Ent, Jumbo loans come in fixed or adjustable-rate options and require a minimum down payment of 5%.
First-time home buyer (FTHB) loans
FTHB loans may be conforming or non-conforming and are designed to help new home purchasers by easing requirements and/or lowering certain costs. To qualify for this type of loan, you typically must be purchasing your first home, although some programs define a FTHB as someone who hasn’t purchased or owned a home in three years or more.
At Ent, our FTHB loan requires a minimum down payment of 3%.
What will be affected by my down payment?
While each loan type has different features and down payment requirements, your down payment amount can have an impact on your loan and finances moving forward. It’s important to weigh the pros and cons of paying more than the minimum required, so you can choose an amount that is appropriate for your financial situation.
Monthly payments
As mentioned in the previous section, having a larger down payment can help you lower your monthly payment in a few ways. The larger the amount you put down, the less you must borrow and the smaller your loan will be.
If you can afford to put more than 20% down, you can also avoid having to pay PMI, which can potentially shave off hundreds of dollars from your monthly payment. Note that PMI does not apply to all loans (like VA loans) and that in some cases, you may have to refinance to remove your PMI payment.
Use a mortgage calculator to see how different down payment amounts can affect your monthly mortgage payment. You may see a more significant impact from a larger down payment when mortgage rates are higher. In a lower interest rate environment, a smaller down payment may leave you with cash in hand to make upgrades/renovations or to put towards other financial goals.
What if I don’t have a large enough down payment
Saving for a down payment can be difficult, especially in areas where home prices are high. It is often cited as one of the most difficult tasks in the buying process. If you’re having trouble coming up with the required amount you think you need for a down payment, there may be resources available to help you.
Check to see what federal, state or county down payment assistance programs and grants you may be eligible for. For example, in Colorado, if you are using one of CHFA’s first-time home buying programs, you may be able to apply for a grant that can go towards your down payment and/or closing costs.
If they have the financial means, a gift from a relative may be another way to help you obtain funds for a down payment. However, lenders may have different rules about if you can use a gift for a downpayment, who the gift can come from, and what types of mortgage loans they can be applied to.
Check with your lender if you plan to use a gift from a relative for a down payment and find out if you’ll need a signed statement or gift letter to verify that it was a gift and not a loan.
There are a lot of options for down payments out there and it doesn’t have to stop you from becoming a homeowner. Work with your lender to see what assistance programs are available and to see if there’s a loan option that may be better suited for your situation.
PLEASE NOTE:
Standard account and credit qualifications apply. All loans are subject to final credit approval. Rates and terms are subject to change without notice and are dependent upon credit performance. Visit Ent.com/Legal to review Ent’s Important Loan Information and Disclosures.
Financing available on homes in Colorado. Property insurance is required. Consult a tax adviser for further information regarding deductibility of interest and charges.
Equal Housing Opportunity | Insured by NCUA
Sources:
1Down payment expectations & hurdles to homeownership
23% down payment options are available for first-time home buyer programs and qualifying conventional loans. Financial details of each loan are based on an individual’s credit score, assets, debt, and overall financial situation. Loan requirements are subject to change at Ent’s sole discretion.
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