How Much is Required to Put Down on a House?

November 20, 2018

Purchasing a property requires a substantial financial outlay, and one of the biggest hurdles for prospective homeowners is coming up with a down payment. The down payment is an advance lump sum payment when purchasing a home, and it is usually a percentage of the home’s total purchase price. Understanding how much is required to put down on a house can help you plan your finances and make informed decisions.

Understanding the Down Payment

The first sum of money you put toward buying a house is known as a down payment. This payment is typically expressed as a percentage of the home’s total price and is paid upfront. Your required down payment may differ significantly depending on a number of factors like the type of mortgage you choose, the lender’s policies, and your financial circumstances. Though there are occasional outliers, down payments typically vary from 3% to 20% of the cost of the property.

Key Considerations for Your Down Payment

When deciding how much to put down on a house, consider the following:

  • Impact on Monthly Payments: A bigger down payment lowers the total loan amount, which decreases your mortgage payment each month.
  • Interest Rates: Greater down payments can result in lower interest rates from some lenders, which, over the course of the loan, could save you hundreds of dollars.
  • Home Equity: The more you put down, the more equity you start with in your home, giving you greater financial security and flexibility if property values fluctuate.
  • Eligibility for Certain Loans: Smaller down payments may limit your loan options, particularly if you have a lower credit score. Certain loans—such as FHA, VA, and USDA loans—have extra fees or requirements but are intended to assist buyers with low incomes.

Factors Affecting the Required Down Payment

It’s critical to comprehend the many variables that could influence the required down payment when getting ready to purchase a home. A better financial plan can be achieved by being aware of these elements in advance, as they can have a substantial impact on the total cost of homeownership.

  • Loan Type

The type of mortgage you choose plays a significant role in determining your down payment amount. Different loan programs have varying requirements:

  • Conventional Loans:
    • These loans are not backed by the government and generally require a higher down payment, typically falling between 5% and 20% of the house’s asking price.
    • Because an FHA loan only requires a 3.5% down payment, it is more accessible to purchasers who might not have a lot of savings.
  • FHA Loans:
    • These Federal Housing Administration-insured loans are intended to assist first-time homebuyers and those with poor credit scores.
    • Because an FHA loan only requires a 3.5% down payment, it is more accessible to purchasers who might not have a lot of savings.
  • VA Loans:
    • VA loans are assured by the Department of Veterans Affairs, which are available to veterans, active-duty military personnel, and their families.
    • A major benefit of VA loans is the potential for 0% down payment, making homeownership possible with no upfront cash.
  • USDA Loans:
    • These loans, backed by the U.S. Department of Agriculture, are intended for rural homebuyers and also offer a 0% down payment option, provided the borrower meets specific income and property requirements.
  • Credit Score

A crucial component is your credit score as it influences both your down payment and the overall terms of your mortgage:

  • High Credit Score:
    • A high credit score (typically 700 or above) is a sign of financial responsibility and lower risk for lenders.
    • With a high score, you may qualify for a lower down payment and better interest rates, reducing the overall cost of your mortgage.
  • Low Credit Score:
    • Lenders may see you as a riskier risk if your credit score is lower, and to offset this perception, they may require a larger down payment.
    • Additionally, you might be subject to higher interest rates, which would raise both the total amount paid over the course of the loan and your monthly mortgage payment.
  • Lender Requirements

Beyond the general guidelines provided by loan types, individual lenders have the discretion to set their own requirements based on various factors:

  • Stricter Down Payment Rules:
    • Certain lenders might want a larger down payment than the minimums stipulated in the loan programs, particularly if they believe you pose a greater risk because of things like poorer credit ratings or high debt-to-income ratios.
  • Additional Conditions:
    • If the home is deemed a higher-risk investment, such as one that requires extensive renovations or is situated in an area susceptible to natural calamities, the lender may also demand a larger down payment.
    • Even for FHA loans, which generally require a 3.5% down payment, a lender might ask for a higher amount if they feel it better secures the loan.
  • Home Price

The cost of the house you want to buy will directly affect the size of your down payment:

  • Percentage-Based Requirement:
    • Usually, down payments are expressed as a percentage of the cost of the house. For instance, a $300,000 home requires a 10% down payment, which comes to $30,000.
  • Impact of Home Price on Affordability:
    • As home prices increase, the cash required for the down payment also rises. A higher home price means you need more money upfront, which could be challenging for buyers with limited savings.
  • Budgeting Considerations:
    • It’s essential to consider how the home price aligns with your overall budget, including the down payment, closing costs, and future monthly mortgage payments. Overstretching on the down payment could leave you financially strained.

How to Calculate Your Down Payment

Calculating your down payment is a straightforward process, but it’s important to understand how different percentages can impact the amount of money you need upfront. Your down payment is determined by multiplying the home’s purchase price by the down payment percentage required by your loan.

Down Payment Calculation Formula

The basic formula to calculate your down payment is:

Down Payment=Home Purchase Price×Down Payment Percentage\text{Down Payment} = \text{Home Purchase Price} \times \text{Down Payment Percentage}Down Payment=Home Purchase Price×Down Payment Percentage

This formula helps you determine exactly how much you will need to save or have available to put toward the purchase of your home.

Examples of Down Payment Calculations

Let’s look at a few examples to see how this formula works in practice:

  • Example 1:
    • Home Purchase Price: $200,000
    • Down Payment Percentage: 10%
    • Calculation: $200,000 × 0.10 = $20,000
    • Down Payment Required: $20,000
  • Example 2:
    • Home Purchase Price: $200,000
    • Down Payment Percentage (FHA Loan): 3.5%
    • Calculation: $200,000 × 0.035 = $7,000
    • Down Payment Required: $7,000

Down Payment Calculation Table

Here’s a table summarizing how different down payment percentages affect the amount you need to save for various home prices:

Home Price 3.5% Down Payment 5% Down Payment 10% Down Payment 20% Down Payment
$150,000 $5,250 $7,500 $15,000 $30,000
$200,000 $7,000 $10,000 $20,000 $40,000
$300,000 $10,500 $15,000 $30,000 $60,000
$400,000 $14,000 $20,000 $40,000 $80,000

Key Considerations When Calculating Your Down Payment

  • Loan Type and Requirements: Depending on the type of loan you select, a certain percentage will be needed for your down payment. For instance, FHA loans typically require only 3.5%, while conventional loans might require anywhere from 5% to 20% depending on the lender and your financial profile.
  • Impact on Mortgage Insurance: A higher down payment can help you avoid additional costs such as private mortgage insurance (PMI) on conventional loans or reduce mortgage insurance premiums on FHA loans.
  • Budgeting for Additional Costs: Recall that the down payment is only one of the expenses involved in purchasing a property. You’ll also need to budget for closing costs, moving expenses, and any immediate repairs or renovations.

The Importance of a Larger Down Payment

While the minimum down payment requirements may be low, there are advantages to putting down more upfront:

  • Lower Monthly Payments: A higher down payment decreases the total amount you must borrow, which lowers your mortgage payment each month.
  • Avoiding PMI: A 20% down payment or more on a traditional loan enables you to avoid paying private mortgage insurance, which can drive up your monthly payment costs by hundreds of dollars.
  • Better Loan Terms: Lenders may offer more favorable interest rates and terms for buyers with larger down payments, which can save money over the life of the loan.

Alternatives to Large Down Payments

If you’re finding it difficult to save a significant amount for a down payment, you have options:

  • Low-Down-Payment Loans: FHA, VA, and USDA loans, as previously indicated, provide low or no down payment possibilities.
  • Down Payment Assistance Programs: Many state and local governments offer programs that provide grants or loans for down payments.

Final Thoughts

When planning to purchase a home, understanding the down payment and its influencing factors is crucial. The required amount can vary based on the type of loan, your credit score, lender requirements, and the home’s price. By carefully calculating your down payment and considering how different loan options affect your financial commitment, you are able to make well-informed choices that complement your long-term financial objectives and budget. Whether opting for a minimal down payment or saving for a larger one, the key is to choose a strategy that ensures affordability and financial stability as you step into homeownership.

FAQs on How Much is Required to Put Down on a House

What is the minimum down payment required to buy a house?

Depending on the kind of loan, different minimum down payments are required. For example, FHA loans typically require as little as 3.5%, while conventional loans might require 5% to 20%. VA and USDA loans often require no down payment for eligible buyers.

Can I buy a house with less than 20% down?

It is possible to purchase a home with less than 20% down. However, if you put down less than 20% on a conventional loan, you may need to pay private mortgage insurance (PMI) until you reach 20% equity in your home. Government-backed loans like FHA, VA, and USDA also allow for lower down payments.

How does the size of the down payment depend on my credit score?

A higher credit score generally allows you to qualify for lower down payment options and better interest rates. Conversely, a lower credit score might require you to put down more money upfront to offset the lender’s risk.

How do I calculate how much I need for a down payment?

To calculate your down payment, multiply the home’s purchase price by the down payment percentage required by your loan. For example, if you’re buying a $200,000 home and need to put down 10%, your down payment would be $20,000.

What are the benefits of making a larger down payment?

By lowering the amount of your loan, a bigger down payment decreases your monthly mortgage payments. It can also help you avoid PMI on conventional loans and potentially secure better interest rates, saving you money over the life of the loan.