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What Is A Down Payment?

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Published on June 3, 2019
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A down payment is the largest cost you’ll face when buying a home.

Understanding what a down payment is, when you’ll need one and how much you’ll need to save for one will help you know how much home you can afford.

What Is A Down Payment?

When you buy a house with a mortgage, the down payment is the portion of the purchase price that you pay upfront, like a good-faith deposit on the home. The rest of the payment price is covered by your mortgage loan. The larger your down payment, the less you have to borrow from your lender. 

For example, if you’d like to buy a $200,000 home and are eligible to borrow $180,000 from a mortgage lender, you’d pay a down payment of $20,000 upfront. You’d then repay the lender the remaining $180,000, with interest, over time.

You’ll pay your down payment, along with other fees, when you close the loan. Because the down payment is a large amount of money, your lender will usually ask you to pay it with a certified check from your bank, a cashier’s check or a wire transfer.

How Much Do I Need For A Down Payment?

Your down payment will be a percentage of the home’s purchase price. How much you’ll need depends on a few factors.

For starters, different loan types require different down payment amounts. Conventional mortgage loans, like a 30-year fixed, are available with a 3% down payment.  FHA loans require 3.5%, while VA and USDA loans are available with 0% down.

Your financial situation will also determine how large a down payment you’ll need. A stronger credit score may help you qualify for a loan with a smaller required down payment.

If you can afford it, though, there are advantages to paying a larger down payment. You’ll likely get a lower interest rate, pay less over the life of the loan and avoid mortgage insurance.

Our mortgage payment calculator can show you how the amount of your down payment would affect your mortgage payments. You can also see how changing that amount would change how much house you can afford.

Comparing Down Payments By Loan Type

Every loan type has its own down payments requirements. These can vary by lender, as well.

Your down payment also plays a role in other costs, like mortgage insurance.

Here is how a down payment works with some popular loan options offered by Quicken Loans.

Conventional Loans

Conventional mortgage loans, like a 30-year fixed and 15-year fixed, have guidelines set by government-backed housing finance companies Fannie Mae and Freddie Mac. These loans typically have stricter eligibility requirements than government-backed loans like FHA loans.

At Quicken Loans, a first-time home buyer can qualify for a down payment as low as 3%.

If you can afford a 20% down payment, you won’t have to pay private mortgage insurance (PMI). If your down payment is less than 20%, you’ll have to pay PMI until you reach 22% equity in your home, though you can request to remove PMI at 20% equity.

FHA Loans

FHA loans are government-backed loans with guidelines set by the Federal Housing Administration (FHA). These loans have more flexible eligibility guidelines than others.

You can get an FHA loan with a down payment as low as 3.5%.

If you buy a home with an FHA loan, and your down payment is more than 10%, you’ll have to pay monthly mortgage insurance (MIP) for the first 11 years. If your down payment is less than 10%, you’ll continue to pay MIP until you refinance to another loan type or pay off the loan.

VA Loans

VA loans help veterans and their spouses buy a home. They are backed by the United States Department of Veteran Affairs.

A VA loan does not require a down payment, which makes it a great option if you are eligible for one.

Unlike a conventional or FHA loan, a VA loan does not require mortgage insurance with a smaller down payment. Instead, you will pay a funding fee to help support the loan program. VA funding fees are typically less than mortgage insurance, and you may be able to waive the fee if you’re receiving VA disability or are a surviving spouse.

USDA Loans

USDA loans are available for homes in rural areas. They are backed by the United States Department of Agriculture.

USDA loans don’t require a down payment, making them a great choice if you meet USDA loan income requirements and are considering a home in a qualifying area.

When you get a USDA loan, you’ll also pay an upfront guarantee fee and an annual guarantee fee. These help support the loan program and are typically lower than the mortgage insurance you’d pay with a conventional or FHA loan.

Jumbo Loans

Jumbo loans are mortgages for more than the loan limit, which varies based on location and property type.  In most of the United States, the loan limit for a single-family home is $484,350.

Because these loans are for such large amounts, they require a larger down payment – usually at least 10% of the purchase price.

Next Steps

Saving for a down payment can be one of the biggest financial hurdles to buying a home. If you’re unsure how much of a down payment you’ll need, we’re here to help! Speak with a Home Loan Expert today at (800) 251-9080.

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