Buying a house is an exciting and fulfilling milestone. But it can also be extremely stressful, especially when it comes to understanding Standard mortgage options. One of the biggest components that first-time home buyers need to understand is down payments – how much money will you need up front for a standard mortgage? While everyone’s financial situation differs, there are some general guidelines and expectations that come with taking out a traditional loan on your dream property.
In this post, we’ll explore what constitutes a “normal” down payment percentage on a house and the different factors that play into this number. Whether you’re looking to avoid PMI insurance or just want the best interest rate possible, read on for all your answers.
What Is the Ideal Down Payment on a House?
To take out an assortment of loans, the minimum down payments can vary. The following outlines the various loan types and their respective required deposits:
1.Conventional Loan
A conventional loan requires a minimum down payment of 5%. This is the lowest acceptable down payment for this loan type. However, borrowers may need to put down 10-20% if they wish to avoid private mortgage insurance (PMI) or secure lower interest rates. If your credit score is below 620 or if you have a lot of debt, then your lender might require that you put down a higher deposit amount.
2.FHA Loan
An FHA loan requires a minimum 3.5% down payment, which can be funded by gifts from family members or other sources. Borrowers are also allowed to use funds from their retirement accounts without penalty as long as the withdrawal does not exceed $10,000.
3.VA Mortgage Loan
A VA mortgage loan offers 100% financing with no money needed at closing and helps veterans finance their home purchases with favorable terms and low-interest rates. If you are eligible for a VA loan, it is possible to purchase a house without any down payment.
4.USDA Loan
A USDA loan is the perfect option if you’re looking to purchase a home in an eligible rural or suburban area! With its government-backed guarantees, this type of loan will provide you with peace of mind as well as financial security for years to come. Don’t have money to put down? USDA loans are a great option, just like VA loans. Unfortunately, Rocket Mortgage® is not currently offering them – but there may be other options available.
What Is the Standard Down Payment on a Home?
According to the National Association of REALTORS, first-time home buyers typically pay an average of 6% for their down payment, while experienced purchasers put down a whopping 13%. Essentially, you should budget between $10,000 and $15,000 for this project. However, the actual cost may differ greatly depending on the type of loan and current market conditions.
Remember, there is no definitive answer to what amount of down payment is necessary when buying a house. If purchasing your dream home feels out of reach due to the down payment, you may be eligible for financial help with this cost. Down payment assistance could provide a way for you to make that first step toward homeownership.
Some of the things you need to consider when thinking about how much to put down include:
- The size of your loan – The bigger the loan, the higher your down payment cost will be.
- Your credit score and history – A good credit history can lower your down payment costs.
- The type of home you are buying – If it is an investment property or in a high-risk market, you may want to put more money down to reduce your risk.
- Your overall financial situation – If you have other debts or need to save money for emergencies, it may be wise to keep your down payment low.
- Your debt-to-income ratio – This ratio should be kept low, as lenders will use it to assess your ability to make monthly mortgage payments.
- Any down payment assistance programs available – Many states and local governments offer programs that help first-time home buyers with their down payment costs.
How close you are to retirement – If you are close to retirement, it may make sense to keep your down payment lower and invest your money elsewhere.
It’s also important to remember that a larger down payment does come with several benefits, such as:
- Lower monthly payments
- Easier qualification for loans
- Reduced risk of foreclosure in the event of financial hardship
Should You Put a Big Lump Sum Down on Your Dream Home?
For those seeking to pay less interest over time and eliminate costly PMI fees, making a larger down payment (in most cases amounting to 20% or more of the purchase price) is an essential step towards achieving their financial goals.
If you have the means to do so, putting more than 20% down on a mortgage could potentially reduce your total interest payments significantly over the life of your loan. Standard Mortgage offers several options for larger down payments, including lump sum and tiered payment options.
Lump sums are single up-front payments that can range from 10% all the way up to 50%, depending on how much you’re able to put down and other factors like credit score and debt-to-income ratio.
Tiered payment plans are structured similarly but allow for multiple payments over time toward larger amounts. This option may be best suited for those struggling to come up with one large sum.
By making a bigger lump sum or tiered payment towards the down payment, you can reduce the overall amount of your loan and the risk of default. It also helps to reduce monthly payments by eliminating or reducing PMI (Private Mortgage Insurance) fees associated with loans that are not 20% paid upfront.
Making a larger down payment also demonstrates financial stability to lenders, which can result in lower interest rates and better terms on loans. In short, putting more money upfront is an excellent way to ensure you get the best rate possible for your mortgage.
When is 20% Down Payment Needed for a House?
The misconception that a 20% down payment is necessarily originated from the requirement of private mortgage insurance (PMI). PMI is a form of insurance that safeguards your lender in the event you cannot fulfill your payments.
Most banks require borrowers to obtain this coverage when they make down payments lower than 20%. Although, it should be noted that PMI does not protect you as the buyer. Rather, it provides security for lenders if anything happens with mortgage servicing.
PMI can be expensive, depending on the amount of your loan and the size of your down payment. This is why many buyers opt for a larger down payment to avoid additional costs. However, it is possible to find lenders who will offer mortgages with lower down payments without requiring PMI. You may have to pay a slightly higher interest rate in this case, but it can still be beneficial if you lack cash upfront.
Aside from avoiding PMI, there are numerous other benefits associated with making a larger down payment. For instance, you may qualify for better loan terms, thus reducing the total cost of your mortgage. Additionally, having a significant portion of the purchase already paid gives you more equity in the property right away.
By paying PMI, you can cancel your insurance and reap the rewards of 20% equity in your home with a conventional loan. When you put 20% down on your loan, not only will you benefit from lower interest rates and a reduced monthly payment, but there are other advantages too. Over the long term, you can save thousands of dollars by reducing your borrowed capital and the amount of interest you have to pay.
Setting aside the funds for a substantial down payment can be an arduous process. However, it is important to keep in mind that with more money put towards the initial purchase, there may not be as much available later on when repairs and renovations are needed.
When selecting the amount to put down on your mortgage loan, carefully consider all of your specific needs and financial situation. Don’t forget that this decision affects how much you borrow and what happens with it in the long run.
Conclusion
According to national statistics, the average down payment for a loan in America is typically around 6% of the total amount borrowed. Nevertheless, you can purchase a home with as little as 3% down payment depending on your credit score and loan type.
If you are eligible for a USDA loan or VA loan, it is possible to purchase a home without putting down any money. Additionally, various types of loans require varying minimums when it comes to the amount of money put down as a deposit.
Therefore, it is important to do your research and consider different loan options to find the solution that works best for you. By knowing and understanding your financing options, you can make an informed decision when it comes to purchasing a home.
Whatever route you choose, be sure to factor in closing costs such as inspection fees, appraisal fees, attorney fees, title search fees, and other related expenses into your calculations. With the right information and preparation, you will be on your way to achieving homeownership in no time.
