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guide to home down payments

Learn all about down payments, how much is required, different loan options and how to save for your down payment on your new home.

What is a Down Payment, and Why is it Required?

A down payment is a payment made at closing that a buyer has saved to help fund the purchase of a home.

This is typically cash you have in savings that does NOT come from a lender and is usually a percentage of the total of the home’s purchase price.

With limited exceptions, a buyer investment, or down payment, is required based on the loan type and loan program. Lenders have determined that you are more likely to repay a loan and less likely to default (stop paying) when your own money is also invested.

This is considered a risk reduction effort by the lender to reduce foreclosures.

The primary exception is paying cash when purchasing a home, which sellers LOVE because there is less risk. A cash purchase removes the need for an appraisal and the loan approval process, making a faster close and leaving the buyer with less outs.

So, How MUCH of a Down Payment is Required?

Many factors are involved in determining and calculating your down payment. Different types of mortgage loans require different criteria.

Traditionally, you need to have a down payment of between 10% and 20% of the home’s costs saved BEFORE you purchase a home.

Recently reported by NAR, the nationwide median down payment is 13 percent of the home purchase price.

For first time buyers, it is significantly less due to programs such as FHA Loans and comes out on average to slightly below 7 percent.

For repeat buyers, the average down payment is 17 percent, which is typically easier to come up with due to having equity in the home being sold.

A lot of the reason behind FHA loans being lower was due to the competition in the marketplace, so sellers were able to cherry pick their ideal loan scenario since they were getting 15+ offers.

Making a large down payment can reduce your interest rate and lower your monthly payment. However, making a smaller down payment can free up more cash for other priorities, such as small renovations or home projects.

The 4 Most Common Types of Mortgage Loans

According to NAR, 94 percent of ALL home buyers used a Fixed Rate Mortgage.

Sixty-nine percent of buyers chose a conventional loan to finance their home, up from 64 percent last year.

Fifteen percent reported securing an FHA loan, and nine percent chose a VA loan.

Conventional Loan – One of the most popular types of fixed rate loans that comes from private lenders, such as Fannie May & Freddie Mac, are conventional loans. Conventional mortgages mostly conform to the Federal Housing Finance Agency policies and are not insured by the federal government. Requirements as of March 2022 call for a credit score of at least 620 with as low as 3 percent down.

FHA (Federal Housing Administration)- This loan offers the second lowest down payment option, with as little as 3.5 percent down and requiring a credit score of 500 or above.

There are two loan programs that do not require a down payment, VA and USDA.

VA loans are solely for Veterans or current serving military.

A USDA loan is a special type of loan that eligible homebuyers in rural and suburban areas can get through the USDA Loan Program, which is backed by the United States Department of Agriculture (USDA) and is designed to help bring growth to rural areas.

How to Save for a Down Payment

Twenty-nine percent of homebuyers said saving for a down payment was the most difficult step in the home-buying process, reported by NAR.

Buyers may find delays in purchasing by debts that may have impeded them such as student loans, high rent/mortgage payments, credit card debt, or car loans.

NARS also reports that the median length of time to save for a down payment because of a hampering debt was four years on average.

Although 65 percent of buyers claim to not need to make sacrifices, there are many ways a potential buyer can make financial sacrifices to afford a down payment on a home purchase.

Cut spending on luxury or non-essential items
Cut spending on entertainment
Cut spending on clothing
Cut spending on vacations

These were the most reported methods of buyers cutting spending to save for down payments in NAR’s most recent profile on Home Buyers and Sellers.

Other Ways to Obtain your Down Payment

Most individuals do not have a significant cash reserve, which, in turn, means they will have to save or find another source for the funds. For repeat buyers, proceeds from the sale of their primary home was the most common way of financing a home purchase at 56 percent, cited by NAR. But NO WORRIES! There ARE other options!

Down payment assistance programs
Home equity loans
Personal savings
IRA (Individual Retirement Account)
401K
Gifted money – (Seek advice from your mortgage agent first to guide you as gifted funds will need to have correct documentation or it could invalidate your loan process)
Supplement your income with a part-time job
Sell some of your belongings

Although purchasing a home has its share of obstacles, obtaining a down payment and mortgage doesn’t have to be one. It just requires time, saving, and planning if your financial resources are scarce.

Create a clear savings goal, streamline your budget to cut the extras, and find ways to boost your income. It is reported that 86 percent of homebuyers share the desire to purchase and own their own home and still see it as great investment!

Interested in Getting Started on Your Home Search Journey Today?

Contact one of our 5-Star Rated Agents who can help you find the home of your dreams and guide you through the process from start to finish.