One of the most common questions I get asked as a lender is How much do I need for a down payment?
The question comes from both first-time buyers and those who are purchasing their fourth home in the last 25 years. The reason it comes up so much is that there’s a lot of confusing information (or misinformation) on the topic floating around the web.
For example, check out this article: Millennials Need a Decade to Save for a Down Payment, Says Study.
A decade sounds daunting, maybe even impossible for many buyers. Articles like this one make home ownership sound like climbing Mount Everest. And they’re flat out wrong for a variety of reasons.
According to a recent study conducted by Harris Poll interviewing 2,000 Americans, 44% believe they need a 20% down payment to buy a home
That’s the number that comes up again and again: 20%. The reason that number has such staying power, is that 20% if where lenders stop charging PMI or private mortgage insurance.
Down payments less than that amount require the buyer to pay for an insurance policy on themselves against default on the mortgage. (PMI is a complicated topic that deserves its own blog post—I will cover it in detail in a future post).
However, 20% is far more than most buyers put down when purchasing a home
The average down payment is closer to 8% according to the National Association of Realtors. And 8% is far more than most lenders require, especially for first-time home buyers.
Many people believe they should put down the largest possible down payment. However, sometimes you’re better off with a smaller down payment, especially for a first-time buyer.
How much do you really need for a down payment? The answer depends on what sort of loan you apply for. Most American’s end up with a loan from one of the 4 major players in home finance:
- Fannie Mae
- Freddie Mac
All of these are government backed in one way or another. Fannie and Freddie are known as “GSEs” or Government Sponsored Entities. That means that when the lender you’re working with funds the loan, it is backed by a guarantee from Uncle Sam. FHA is similar, but run by HUD (Housing and Urban Development). VA falls into its own unique category, which we’ll get into in a bit.
If you apply for a “Conventional” loan, your loan will be underwritten and guaranteed by either Fannie Mae or Freddie Mac. They’re the major players, and underwrite and guarantee most loans in the United States.
Fannie Mae and Freddie Mac require a minimum 3% down payment for a first-time home buyer. You read that right.
A 3% down payment will get you into a new home if you are a first-time buyer
You must be a first-time buyer to put down only 3%, but there’s an interesting caveat: Fannie and Freddie define “first-time” as someone who hasn’t owned a home in the last 3 years. If you owned a home 3+ years ago and are now buying again, you will qualify with a 3% down payment.
If you have good credit and are purchasing in Colorado, it gets even better: You can qualify for a mortgage with a 1% down payment!
New American Funding, the company I work for, has a unique program for first time buyers with good to excellent credit. We offer a 1% down payment program with a 2% grant (free money) that comes directly from us!
Sound too good to be true?
Here’s how the 1% down payment program works
We require the buyer to bring 1% of their own funds, and then back that up with a 2% grant which we pay to get the borrower to the 3% required by Freddie Mac. The money really is a grant, which means its free, no strings attached. For a buyer purchasing a $300,000 home, that’s $6,000 in free money.
The rates and terms on these loans are almost identical to those on a standard conventional loan. The rate is slightly higher, usually about .125% to .25% more than someone putting down 3% of their own money, but for a buyer with limited liquid assets, it can be the different between buying a home now or waiting several more years.
The 1% down program is unique to New American Funding. We are the only lender in Colorado that offers it
So what if you’re not a first-time buyer? What is your minimum down payment?
The answer is 5%, unless you go with a FHA loan.
Freddie and Fannie require 5% for buyers who have owned a home in the last 3 years
FHA on the other hand, requires 3.5% regardless if you are a first-time buyer or are purchasing your 10th home. FHA also works with buyers who have less than stellar credit. For folks who have had a bankruptcy or foreclosure in the last few years, FHA is the way to go.
FHA has some downsides (one of which is higher PMI or private mortgage insurance rates), but they would require their own blog post to cover in detail.
Which brings us to VA
If you are currently serving in the armed forces or were honorably discharged, you will qualify for a VA loan that requires NO down payment. Veterans purchasing a new home can put down 0%. It’s the lowest requirement in all of lending, but only applies to service members and veterans.
The best answer to the question How Much Do I Need for a Down Payment? is It depends on your unique circumstances, goals, and objectives.
You need to talk to a professional who can help determine what you will qualify for based on your credit, income, and a comprehensive understanding of your finances. Your needs are unique, and working with a knowledgeable lender who can talk you through every aspect of your transaction.
I’ve worked as a mortgage lender for almost fifteen years and have helped hundreds of clients buy homes in seven different states. I can help you determine what you’ll need, and find the right program that gets you into your dream home for the lowest possible cost and with the lowest possible rate.
My contact details are in my signature