How Much Money Do You Need for a Home Down Payment?
If you’re thinking about buying a home, one of the first filters you likely added to your search was price – why look at million dollar homes when you know can’t afford one?
However, before you can decide on your home shopping budget, you’ll need to know how much you can actually spend. And a significant portion of that consideration will be your down payment.How much money you will need for your down payment will depend on the type of mortgage you get, the kind of home you are buying, your financial situation, and more.
For example, if you already own a home, and you want to buy a second one, you may want to look into refinancing our current one and come up with the second home down payment with the savings made in the process of refinancing.
Conventional Mortgage Loans
In 2017, the majority of conventional loans require down payments between 15 and 20%. Given the strength of the housing market, this amount can be intimidating for many prospective homeowners.
However, there are benefits to paying more up front, if you are able. The larger your down payment, the less you end up borrowing, which means you’ll pay less interest over the life of your loan. Additionally, if you can put down 20%, you won’t need to pay for additional private mortgage insurance (PMI), which will also keep your costs down over the long run.
You’ll need to have a credit score of at least 620 to qualify for a conventional loan, although some lenders may have higher requirements.
If you are a veteran, active service member, or a family member of an active service member you can qualify for a VA loan, which will require no down payment. As with most special loan programs, you’ll apply through a private lender of your choice, but the federal government backs the loan itself.
While there is no set minimum credit score to qualify for a VA loan, you’ll find most lenders look for a minimum score of 620. Depending on your level and length of service, you can qualify for better loan terms and additional benefits.
FHA loans are attractive to buyers for several reasons, including having less stringent application requirements. However, the fact that FHA loans may require as little as 3.5% down is what makes them most appealing to borrowers, which is why FHA loans account for almost one-quarter of loans closed in 2017.
To qualify for the lowest down payment, you’ll need to have a credit score of 580 or higher. If your score is between 500 to 580 you can still qualify for an FHA loan, but your down payment will be 10% – still preferable to many conventional loan structures.
FHA loans can offer such low payments because they are backed by the federal government, but borrowers will have to pay mortgage insurance premiums rolled into their overall loan cost. However, your FHA loan will not be issued by the government, but rather by a traditional lender. Because of this, particular lenders may have different credit requirements to qualify for the most significant benefits.
USDA loans are available for properties in areas designated as rural by the government, and these can be found through the USDA property map. However, you might be surprised by the definition of rural as many of the covered areas are near to metropolitan areas, so it’s always worth checking to see if your prospective home qualifies.
You’ll typically need a credit score of at least 640 to get approved for no down payment, but again, you’ll need to apply through a lender, not the government, so requirements may change.
No matter what loan type you choose, it’s important to consider additional costs for your mortgage, such as interest rates and lender fees. Get started by checking mortgage rates in your area so you can anticipate the total cost of your loan – and your potential down payment.