Down Payment: What Is It And How Much Will It Cost?
You’ll have several payments when buying a home. These fees could be for inspections to homeowners insurance to real estate attorneys. But one of the biggest costs you’ll encounter is your down payment. Fortunately, you might not have to spend as much on this as you might think.
What Is A Down Payment?
A down payment is the amount of money you pay upfront in a real estate transaction. It’s a percentage of the purchase price of your home, typically ranging from 3% to 20% of the home’s purchase price.
The challenge for buyers is that a down payment – which can cost tens of thousands of dollars depending on the home they are buying – is only one cost they face when purchasing a home. Buyers also must pay closing costs. These can run from 3% to 6% of a buyer’s loan amount, so $9,000 to $18,000 on a mortgage of $300,000.
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What Is The Average Down Payment On A House?
The average first-time buyer pays about 6% of a home's purchase price when coming up for a down payment, according to research from the National Association of REALTORS®. That’s a down payment of $19,500 on a home costing $325,000.
That’s a lot of money. But you don’t need to come up with that large of a down payment. You might qualify for a conventional mortgage loan that requires a down payment as low as 3% of your home’s final purchase price.
How Much Is A Down Payment On A House For Each Loan Type?
You can choose from several different loan types when applying for a mortgage. And each of these loans requires different minimum down payments.
A conventional loan is one not insured by a government agency. Instead, these loans are guaranteed by the government-backed housing finance agencies of Fannie Mae and Freddie Mac. The minimum down payment for a conventional loan is 3% of your home’s final purchase price.
An FHA loan is one insured by the Federal Housing Administration. If your FICO® credit score is 580 or higher, you can qualify for one of these loans with a minimum down payment of 3.5% of your home’s purchase price. If your FICO® Score is at least 500, you can qualify for an FHA loan with a minimum down payment of 10% of your home’s final price. It’s important to note that Rocket Mortgage® requires a minimum credit score of 580 for FHA loans.
VA loans are backed by the U.S. Department of Veterans Affairs and are considered attractive because they require no down payment at all. That’s because the goal of these loans is to help veterans and active-duty members of the U.S. Armed Forces buy homes.
The challenge is that not everyone qualifies for these loans. You must be an active-duty member of the U.S. Military, a veteran of the Armed Forces or the unmarried widowed spouse of a veteran.
While these loans don’t require down payments, you will have to pay funding fees when taking out a VA loan.
A USDA loan is insured by the U.S. Department of Agriculture. Like VA loans, most buyers won’t need to provide any down payment when taking out a USDA loan. As with VA loans, though, not all buyers qualify for these loans. To apply for a USDA loan, you must purchase a home in an area that the department considers rural. To determine if a home qualifies for USDA financing, check the requirements. Currently, Rocket Mortgage does not offer USDA loans.
Each year, the Federal Housing Finance Agency sets limits on how much mortgage money lenders can loan to individual borrowers and still originate what is known as a conforming loan. A jumbo mortgage is any home loan that is for more than this limit.
In 2023, the conforming loan limit for most parts of the country will be $715,000. If you want to borrow more than that amount next year, you'll need to apply for a jumbo mortgage. These mortgages are riskier for lenders, so they require larger down payments. The amount you'll need varies by lender and is influenced by your credit score and loan amount, but you’ll typically need to provide a down payment of at least 10% of your loan amount.
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Down Payment FAQs
Questions about down payments? Here are some answers.
How much of a down payment should I put on a house?
How much you put down depends on your financial situation, the size of your loan and your loan type. While some mortgage types might not require any down payment at all, you are free to put down however much you’d like. Be careful, though, that you don’t spend all your savings on a down payment. You’ll still need money to cover closing costs and other loan fees. Most lenders also prefer that you have enough savings to cover two monthly mortgage payments. If you drain your funds to come up with the largest possible down payment, you might not meet this requirement.
What are the benefits of putting down a larger down payment?
If you can afford it, and you have enough savings built up, there are plenty of benefits to coming up with a larger down payment. Typically, lenders reserve their lowest interest rates for borrowers who come up with larger down payments. That lower rate will equal a lower monthly mortgage payment, a positive for your finances.
If you come up with a down payment of at least 20%, you also won’t have to pay for private mortgage insurance (PMI) if you are applying for a conventional loan. This insurance protects your lender if you fail to make your mortgage payments. The cost of PMI varies, but you can expect to pay from 0.1% to 2% of your loan amount each year for this insurance.
Finally, you can build equity in your home faster if you come up with a larger down payment. Equity is the difference between what you owe on your mortgage and what your home is worth. If your home is worth $400,000 and you owe $300,000 on your mortgage, you have $100,000 in equity. Having a significant amount of equity increases the odds that you’ll make a solid profit when selling your home. You can also borrow against your equity in the form of home equity loans, using the money from these loans for whatever you want. The larger your down payment, the more equity you’ll have in your home even before making your first mortgage payment.
Where does down payment money come from?
Looking for money for your down payment? You can find these dollars from several sources.:
- Down payment assistance programs: States and local agencies, such as your county, typically offer down payment assistance programs that can help you find enough money for a down payment. These programs are usually localized. To find them, speak with your real estate agent or mortgage loan officer.
- Down payment gifts: Someone can gift you all or part of the funds for a down payment. The key, though, is that these dollars must be a gift, and not something you need to pay back. Whoever gifts you the funds must provide a letter stating that the dollars they’ve given you are a gift.
- 401(k) plan: Some 401(k) plans allow you to borrow against them. If yours falls into his category, you can take out a loan from your retirement plan to pay for a down payment. This might not be the best financial move, though. You will have to pay back your loan, with interest. You’ll also be taking a bite out of your future retirement savings by using this money for any other use.
- Your own savings: The best source for down payment funds might be your own savings. This means that you might have to start saving long before you are ready to buy a home. As housing prices rise, so do the size of down payments. Make sure to start setting aside money for a down payment far enough in advance so that you’ll have enough stashed away when you’re ready to buy.
What is down payment assistance and should I use it?
Need help coming up with down payment funds? A down payment assistance program could help. Most of these programs, typically offered by state or local sources, provide funding to homebuyers to either cover or reduce the down payment money they need to come up with. Some come in the form of interest-free loans that you won't have to pay back until you sell your home or refinance your mortgage. Others are grants that you never pay back.
You might not qualify for all down payment assistance programs because some are only available to first-time buyers while others require a minimum credit score. Still others require that you not make more than a specific income each year. You can find down payment programs by searching the website of the U.S. Department of Housing & Urban Development here. You should also check with your lender to make sure they accept the down payment assistance program you’re interested in.
These programs can be a good option if you don’t have enough funds saved or don’t have access to down payment gifts from family members.
The Bottom Line
The down payment is a key cost of the home buying process. But if the cost of that down payment seems steep, remember that you have options. You can seek gifts, apply for assistance programs or come up with a smaller, more affordable, down payment. If you are ready to begin your home buying journey, you can get started on meeting your financing needs with us.
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