For many home buyers, saving for a down payment is the most difficult part of the home buying process, and deciding on the right amount is often a matter of debate.
The median down payment for a home over the past two years was around 6-12%. According to the REALTORS®Confidence Index, however, 35% of recent mortgages in 2020 were made with a down payment of 20% or more.
There's a huge jump between these figures, so what should you shoot for? Will you be able to buy that dream home if you can't hit the idealized 20% mark? Good news, you have great options that will fit right into your budget.
First Things First: What is a Home Down Payment?
The money you spend on a down payment is a percentage of the price of a home that is not financed. In other words, this is the amount of cash that came out of your pocket at the time of the sale, and from that point onward, the amount you spend is on mortgage payments. The down payment amount is also the equity you have in your home at the time of purchase.
Lenders require a down payment to balance the risk of the mortgage loan, backed by the idea that borrowers are far less likely to default on payments when they also have an investment at risk.
20% is the Sweet Spot, but Why?
Long story short, making a 20% down payment can save you thousands of dollars throughout the life of your loan. If you are able to make a down payment of this size, you don't have to pay for Private Mortgage Insurance (PMI) which can add greatly to your monthly mortgage payments as a way for lenders to quickly balance the risk of a lower down payment. Your interest rates are generally lower as well.
If 20% isn't attainable, there are still more affordable down payments out there for you.
Government-Insured Loans, Starting at 0% Down
These loans are backed by the government as the name implies and are often less strenuous for buyers to qualify, including those with lower credit. The most common government-insured loans are FHA, VA and USDA mortgages. FHA loans require 3.5% down payments, while VA or USDA loans don't require any down payment.
Government-insured loans allow for buyers to purchase with less or even no money down and often with less income, but can have higher interest rates and take longer to be approved.
Conventional Loans, Starting at 3% Down
Conventional loans apply to any mortgage not insured by the government, with generally stricter qualifications. Borrowers typically need decent credit and a steady income.
Conventional 97 loans only require you to pay 3%, while borrowers with lower credit scores may be required to make a down payment of 5% or more to get a conventional loan.
This is a great option if you are in a stable place financially, but want to keep capital for closing costs and other updates around your new home.
Which % Should You Aim For?
Multiple factors affect how much your down payment should be, including your finances, your credit, your age, and how many years you want to spend in the home. The answer is, there is no answer that works for every situation.
If you are stressing that you won't be able to put back 20% for a new home, lay those worries aside. It is entirely possible to receive financing for a home by putting a minimal amount down. An average of 11-12% can still carry you far with the right team.
Want to find the best solution for your personal financial situation? Our team at Metro Brokers Financial is there to help. Our friendly, helpful loan officers shop lenders for the best rates depending upon each borrower's unique situation. Head over to our landing page here to talk to an experienced mortgage consultant: https://www.metrobrokers.com/mortgage.