Typical Down Payment On A House
Buying a home usually involves at least one major expense; the initial down payment at the time of purchase. This is similar to making a down payment on a vehicle.
However, unlike a car, certain kinds of mortgages require a certain down payment.
We will explain the purpose of the down payment, and much more, in the following article.
Down Payments Will Vary Widely
The amount of money that is needed for a down payment will vary widely. Some loans, such as the VA mortgage and the USDA home loan, have options for borrowers to purchase a home with a no down payment requirement.
Other loans, like some Jumbo mortgages, ask the borrower to pay 15-20% of the selling price as a down payment.
And then some mortgages request an amount between 3% and 15% of the selling price.
The down payment percentage will be based on the borrower’s credit history, the type of loan they need as well as their available funds.
What is Your Overall Budget?
To determine the down payment that you will need, you first need to calculate how much you can afford for a home.
A typical rule of thumb is that most people can qualify for a home that is priced around 2 to 2.5 times your annual salary.
So, if your current household income is $125,000 per year before taxes are removed, then you could qualify for a home in the price range of $250,000 to $312,500.
However, you need to be very careful when doing the math to afford a home. Buying a home involves MUCH MORE than just the monthly payment.
As we have mentioned, there will likely be some sort of down payment. There will also be some closing costs, which will be discussed later.
If you plan to hire movers to help with getting you relocated, that is another expense.
You will also be expected to pay yearly property taxes as well as homeowner’s insurance.
On top of all this, there are the maintenance and repairs that come with owning a home. Lawn care, heating & air conditioning maintenance, plumbing maintenance, replacing a roof, and so many other things have a way of popping up at the absolute worst time.
All of these things go above and beyond the monthly mortgage payment amount, and you need to have a plan in place to tackle these items when they occur.
Determining the Loan-to-Value Ratio
As mentioned before, some mortgages will allow a borrower to make a really small down payment while other loans require a larger down payment.
The down payment impacts the mortgage loan-to-value calculation. This is often called the LTV.
For example, the LTV of an FHA loan cannot be larger than 96.5% This is calculated by dividing the mortgage amount by the home’s appraised value.
So, for a home that is selling for $200,000, FHA will only approve a loan up to $193,000. The remaining $7,000 must come from the borrower or in the form of a gift from a family member.
To qualify for a particular loan, you and your mortgage lender will need to determine if you have the funds needed to make a down payment for that specific kind of mortgage.
Calculating Private Mortgage Insurance Based on Down Payment
Another item that is impacted by the down payment is the monthly private mortgage insurance rate, also called PMI.
This is a fee, charged by a 3rd party, to provide an insurance policy to cover the lender if the borrower is not able to make the payments and the home is foreclosed.
A larger down payment will reduce the monthly premium for the PMI.
Private mortgage insurance is usually charged on any mortgage loan if the borrower pays less than 20% down. This is one of those items we mentioned above when we discussed the part of buying a home that includes much more than just the monthly payment.
However, the VA Mortgage does not charge private mortgage insurance for any of its loans.
No to Low Down Payment Options
Several options will allow borrowers to pay less than 5% of the selling price as a down payment.
The VA Mortgage is the most popular no down payment requirement option. For qualified veterans, active duty service, and a few other military groups, the VA will allow a borrower to get a loan with a NO down payment requirement. This is the biggest selling point of the VA mortgage and the primary reason that so many veterans use this kind of mortgage for buying a home.
Another loan that allows for a no down payment option is the USDA Home Loan. This mortgage has a few restrictions, but it can be extremely helpful to people that qualify for the loan.
The first restriction of the USDA loan is the location of the home. The property must be in an area defined as rural by the USDA. Their website has a lookup feature that will allow a borrower to see if their potential property is designated as rural by simply typing in an address. As of the time of this writing, over 80% of the country is considered rural by the USDA map, so you should be able to locate a property that meets these criteria.
The next restriction is the borrower’s income. Their income level must be near the average for their general area to qualify for the loan.
The most popular program with a low down payment requirement is the FHA loan. Backed by the government, FHA will allow qualified borrowers to purchase a home with as little as 3.5% down payment. This program is very appealing to people that may have suffered a financial problem in recent years and have re-established their credit over the last 24 months.
There are also programs from Fannie Mae and Freddie Mac that allow for a small 3% down payment. The Fannie Mae program is called HomeReady and Freddie Mac’s program is named Home Possible Advantage.
Down Payments for Jumbo Mortgages are Typically Higher
A jumbo mortgage is any loan amount higher than the conforming loan limit. At the time of this writing, the loan limit for a conventional loan is $548,250. If a borrower buys a home and requests a loan higher than $548,250 then it would be considered a jumbo mortgage.
For an FHA loan, the maximum loan amount in most areas for a single home is $356,362.
Jumbo mortgages present more risk for the lender. Since the amount is so large and the loan cannot be easily sold to another mortgage lender or mortgage investor, the lender is taking a bigger chance on the borrower. Therefore, the interest rate will be a bit higher than a typical mortgage loan and the down payment will also be higher.
A down payment on a jumbo mortgage can range from 10% to 20% of the home’s asking price. The down payment will depend on the borrower’s credit history, source of income, available funds for the down payment, and possibly excess funds to cover the mortgage payment in the event of a financial crisis.
Be Very Careful with Non-Occupying Co-Borrowers
Sometimes people find themselves in a situation where they have a good steady job that will allow them to easily afford a mortgage. However, their credit score may be on the low side and they need help.
FHA along with Fannie Mae and Freddie Mac will allow a non-occupying co-borrower to sign on the loan to help with either credit issues or yearly income problems.
But the programs do not work the same.
FHA will require that the non-occupying co-borrower is someone related to the borrower by law, or by marriage, or by blood. The lender will ask for documented proof to show the relationship.
If the co-borrower cannot be properly documented to be a relative to the borrower, the down payment requirement will increase to 25% of the home’s selling price.
On the contrary, Fannie Mae and Freddie Mac will not require the non-occupying co-borrower to be related to the borrower.
Available Charities for Helping with Down Payment
Several states offer grants and other kinds of assistance to aid borrowers with the down payment. Your mortgage lender can advise you as to which mortgage loan will accept this kind of assistance as well as provide your contact information for the nearest office that may offer the aid.
Most of the down payment programs across the country base their help on the borrower’s income level and typically are designed for people that are purchasing their first home.
Some of these programs will ask the borrower to repay the grant or loan, and other programs will simply gift the money to the borrower. You will need to investigate the available resources in your area to determine if the money needs to be repaid.
Keep in mind that if you qualify for one of these grants and it is expected to be repaid, this new loan payment will impact your debt-to-income ratio. It is very important to discuss this type of grant or loan with your mortgage lender to make sure you still qualify for the home loan.
Don’t Forget About Closing Costs
While each loan is a bit different in the various closing costs, each mortgage will incur some costs to complete the transaction.
Most real estate agents will ask a potential buyer to pay earnest money when they put in an offer on the home. This can range from $500 to $2,000 or possibly more. This money will usually be applied to the price of the home, but you will still need to be prepared to pay the fee. The fee is paid by the borrower at the time the offer is made on the home.
There will be an appraisal of the home and possibly a survey of the property. A credit report will be pulled from at least one credit bureau.
A local property attorney will research the title of the home to determine if there are any liens on the home and if the home can be passed from the current owner to the potential buyer for the agreed purchase price.
The local attorney will also handle closing the loan and disbursing the funds to the seller, the real estate agent, and any other interested party. And then the new deed to the home will need to be recorded at the appropriate county courthouse.
There will also likely be an escrow fund established. The escrow fund is designed to pay the yearly property taxes and homeowner’s insurance. The fund will usually start with some reserves to cover 2 to 4 months of taxes and insurance.
All of these fees can add up to several thousand dollars. Your mortgage lender can provide you with a Loan Estimate that spells out the items being charged to you and an approximation of the total of the costs.
While the seller of the home can pay a portion, or perhaps all of the closing costs, you should not count on this when you are planning and negotiating. You don’t want to pin your hopes on buying a home, with the assumption that the seller will happily pay the closing costs, and then learn that you will be asked to pay several thousands of dollars at the time of the closing.
Ideas for Saving Money to Buy a Home
Here are a few ideas that may help you develop a strategy for saving the money needed for the closing costs, moving expenses, and down payment on your home.
- Cut your bills – look over your bills for the last 3 to 6 months and decide if you can lower or eliminate any items. Cut back on items like weekly dining out, entertainment, and unnecessary subscriptions to save several dollars per month.
- Create automatic savings – if you have your pay directly deposited to your checking or savings account each pay period, ask your payroll administrator if you can designate a certain amount to go to a savings account. This will make it less painful and much easier to save up money.
- Find a part-time job – if your current job is enough to cover all your basic needs, consider taking on a part-time job for 10+ hours per week. When you get paid from the 2nd job, simply deposit that money into your savings. When you have enough saved, you can quit the 2nd
If you combine these 3 tips, you could save up for a down payment much faster than if you used only one or two of the ideas.
Summing Up How Much Money Do I Need for a Down Payment on a House?
If you have been renting for some time, you are accustomed to the monthly payment needed to keep a roof over your head. With a bit of planning, you can save up the funds you need and prepare for the journey of becoming a homeowner.
Additional Home Buyer Resources:
If you are unsure of what is on your credit report, take a look at this post about why Bill Gassett recommends Credit Karma. Knowing ahead of time what is on your credit report and cleaning it up, if necessary, can save you a huge headache later on in the home buying process. It can even change what mortgage programs you are eligible for and at what rates/terms.
Wondering what typical closing costs look like? Conor MacEvilly walks you through what you could expect for closing costs when buying a home and what each cost means. These are general closing costs and the costs that you experience in your area may vary slightly.
About the author: This article on “How Much Money Do I Need for a Down Payment on a House?” was written by Luke Skar of MadisonMortgageGuys.com. As the Social Media Strategist, his role is to provide original content for all of their social media profiles as well as generating new leads from his website.
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