How Much Down Payment Do I Need?

If you are considering buying a home, one of the top questions in your front brain is “How much down payment do I need?”

Most people assume you need the traditional 20% of the estimated value of the home you intend to buy to put down. However, check these facts out:

• The average down payment on a home is only 11%
• Half of American home buyers put down less than 20%
• A whopping 70% of first time home buyers put down 10% or less   

If you’ve been laboring under the assumption that you have to reach the magical 20% down payment amount before going home shopping, it might be time to reevaluate. You could qualify to buy a home with much less, and be able to cover closing costs to boot. Here’s what you need to know. 

Lower Down Payment Options

A lower than 20% down payment is extremely easy to get if you qualify for a specific type of loan program. There are several types of programs that you can apply for, including loans for low income individuals, veterans, or first-time homebuyers.

Low or no down payment programs

Are you a first-time home buyer (FTHB)? If you have good credit, you can get away with just a 3% down payment on Fannie Mae and Freddie Mac’s HomeReady and Home Possible loan programs. If you meet certain income limit restrictions, you can qualify even if you are not a FTHB.

You might qualify for a Federal Housing Authority (FHA) loan. These allow you to buy a home with only 10% down, with a low credit score. If your credit score is 580 or higher, you can qualify for a 3.5% down loan.

Veterans or veteran spouses, may qualify for a loan backed by the Department of Veteran Affairs (VA), complete with zero down payment. 

Ask your LO if you qualify for any of these programs, or any other federal or state programs available for down payment assistance.

Private Mortgage Insurance (PMI)

Be aware that if your lender approves a loan for more than 80% of the value of the home, you’ll have to buy private mortgage insurance (PMI) in an amount that varies based on your credit and the LTV ratio. This may be paid up front or as a monthly addition to your mortgage. If you get your equity up past 20%, you may be able to get this requirement taken off or refinance to remove it. 

Ways to Get a Down Payment

Even if you make a small down payment, you may need to be creative to cover this cost and still pay your closing costs, too. Think about exploring the following options for alternative down payment sources:  

Family member gifts

You may be able to fund part of your home purchase down payment with a “gift.” You’ll need a letter from the person who gifted you the money saying it is a gift specifically for buying a home, and NOT a loan with an expectation of repayment, and the money needs to be in your possession. You may be able to receive this gift and use it for your down payment with no tax penalty.  

Assistance programs

There might be some local assistance programs that can help with your down payment in the form of a grant. You can ask your LO if you qualify for such a program, and remember to note if you are a FTHB.  

Retirement funds

An early withdrawal may incur no penalty if you are using it to fund a home purchase. Ask your LO if this is an option, and carefully calculate the effect taking this option will have on your future. Being able to tap in and put up a complete 20% down payment on a conventional home loan could mean savings as much in interest that you are able to restore the money well before the home is fully paid off. 

Relocation

If you are moving, your employer might be convinced to cover some of your relocation expenses. A lump sum can be used for part of your  down payment and help you bridge the gap if you’re still waiting for an existing home to sell.

Saving Money to Buy a House

You’ll still have closing costs even if you defray a lot of your down payment. Here’s how to save your money and buy a home sooner. 

Automated savings

Open a high yield savings account and direct a portion of your paycheck to it automatically every month or week. This can quickly build savings as long as you don’t touch the account. Choose an amount you won’t quite miss to prevent temptation or dire straights.

Debt paydown

High interest credit cards hurt your LTV, so start paying extra so you can wipe out this debt. Once the debt is gone, redirect that monthly payment into savings to bulk up your piggy bank even faster.

Work extra

Look for a part-time, seasonal, remote worker or gig job. You can earn extra cash at night or on the weekends and put all of it in savings to build up your stash. You can freelance if you have marketable skill, work seasonal hours at a local store, or take a phone job you can do from home.

Pay yourself first

Make a list of the bills you HAVE to pay every month, and make a payment to your savings account at the tip of your list. By prioritizing a set amount instead of saying “oh, whatever’s leftover” can make you more consistent. Use “whatever’s left over” for pocket cash so you don’\t feel deprived.  

One or more of these options can help you save for a down payment and closing costs and get you further down the path to owning your dream home.