Down Payment: The Traditional Home Buying Cost

Traditionally, the down payment on a house has been 20% of the purchase price. However, this is not a requirement, and in recent years, the average down payment has been lower. In 2023, the median down payment for all home buyers was 15%, according to the National Association of Realtors (NAR). First-time home buyers typically put down less than repeat buyers, with a median down payment of 8% compared to 19% for repeat buyers. The average down payment also varies by location and age group, with older buyers and those in more expensive housing markets tending to make larger down payments.

First-time buyers: 6-8% down

First-time home buyers are faced with a unique set of challenges when it comes to purchasing their first property. One of the most significant hurdles is saving for a down payment. The traditional down payment for first-time home buyers is between 6% and 8% of the total cost of the house. This amount can be a challenge for many, especially considering the ever-increasing property prices.

Saving for a down payment can be a daunting task, but there are strategies to help first-time buyers achieve their goal. Here are some tips to help you save for your first home:

• Start by determining your budget and the required down payment: The down payment for a conventional loan is typically 3% for first-time buyers, while other loans may require 5% or more. It's important to research the different loan options available to you and understand the associated down payment requirements.
• Utilize first-time home buyer programs: Many lenders and government programs offer assistance specifically for first-time home buyers. These programs can provide grants, low-interest loans, or other forms of financial aid to help with the down payment and closing costs. Examples of such programs include Conventional 97, Fannie Mae HomeReady, and Freddie Mac Home Possible.
• Compare mortgage rates and shop around: Don't settle for the first lender you find. By comparing rates and shopping around, you may be able to find a lender that offers a lower down payment requirement or more favourable terms.
• Automate your savings: Consider setting up automatic transfers from your paycheck or monthly income to a dedicated savings account for your down payment. This will help you save consistently and efficiently without having to remember to transfer funds manually each time.
• Reduce your debt-to-income ratio: Lenders consider your debt-to-income ratio when determining your eligibility for a loan. By increasing your income or paying off existing debts, you can improve your ratio and potentially qualify for more favourable loan terms, including a lower down payment.
• Take advantage of gift funds: According to the National Association of Realtors, approximately 7% of buyers received gift funds for their home purchases in 2022. These gifts from family members or other sources can help cover all or part of the down payment, making it easier to achieve your homeownership goals.

Remember, saving for a down payment takes time and discipline. Start by determining your budget and the required down payment, then explore the various assistance programs and loan options available to first-time buyers. With careful planning and persistence, you can achieve your dream of homeownership.

Repeat buyers: 17-19% down

Repeat buyers are likely to have more money to put down on a house than first-time buyers. This is because they have had more time to build wealth and home equity. According to the National Association of Realtors, the average down payment for repeat buyers was 17% in 2022, and 19% in 2023.

In 2023, the median down payment for a repeat buyer was $74,917. This is based on a median existing-home sales price of $394,300. The average down payment for repeat buyers varies by state. In California, the average down payment was $84,244, while in Iowa, it was $34,357.

The down payment amount can also depend on the type of mortgage. For example, a conventional mortgage usually requires a down payment of 3% to 5%. On the other hand, a jumbo loan, which is for a larger loan amount, may require a down payment of 10% or more.

It's important to note that these down payment requirements are just the minimum. As a mortgage borrower, you can put down as much on a home as you like. In some cases, it may make sense to put down more than the minimum requirement. This could help you get a lower interest rate and save money in the long run.

Conventional loans: 3-5% minimum

Conventional loans are the most common type of mortgage option. The minimum down payment requirement for a conventional mortgage loan is 3% for first-time home buyers or 5% for other buyers. However, if your credit score is lower than 620, or you have significant debt, your lender might require that you put a larger percentage down. Conventional loans with a down payment of less than 20% will result in having to pay private mortgage insurance (PMI).

Conventional loans come in two types: fixed-rate and adjustable-rate. Fixed-rate loans keep the same interest rate over the life of the loan, providing stability in monthly payments. Adjustable-rate mortgages (ARMs) have interest rates that can change, potentially offering lower initial rates but with the risk of increasing over time.

If you are a first-time home buyer, you may qualify for a conventional loan with a down payment as low as 3%. Some programs, such as Fannie Mae's HomeReady and Freddie Mac's Home Possible, are specifically designed for first-time buyers and require a 3% down payment.

FHA loans: 3.5% minimum

FHA loans are government-backed loans insured by the Federal Housing Administration. They are popular among first-time home buyers due to their more lenient credit and income requirements. The minimum down payment for an FHA loan is 3.5% for borrowers with a credit score of 580 or above.

If your credit score falls between 500 and 579, you will need to make a down payment of at least 10%. FHA loans are a good option for those with lower credit scores who may not qualify for other types of mortgages.

While FHA loans offer a low down payment option, it's important to consider the additional costs associated with these loans. FHA loans require mortgage insurance premiums (MIP), which can be a significant added cost and are typically paid for the life of the loan. However, if you make a down payment of at least 10%, the MIP will end after the first 11 years.

Additionally, FHA loans have specific requirements for the property being purchased. The home must meet certain safety, security, and soundness standards, and there are limits on the amount you can borrow. These loan limits vary by county and are based on the cost of living in each area.

When considering an FHA loan, it's important to weigh the benefits of the low down payment against the potential long-term costs of the mortgage insurance. In some cases, refinancing to a conventional loan after building enough equity may be a more cost-effective option in the long run.

Overall, FHA loans with a minimum down payment of 3.5% can be a great option for first-time homebuyers or those with lower credit scores. However, it's crucial to understand the associated costs and requirements to make an informed decision.

VA and USDA loans: 0% down

Overview

The U.S. Department of Veterans Affairs (VA) and the U.S. Department of Agriculture (USDA) offer loan programs that allow eligible homebuyers to purchase a home with no down payment. These loan options are designed to increase homeownership opportunities for veterans, service members, and rural residents.

VA Loans

VA loans are provided by private lenders but are backed by the VA, offering several benefits to eligible borrowers:

• No down payment required: VA loans eliminate the need for a down payment, making homeownership more accessible for those who may not have substantial savings.
• Competitive interest rates: VA-backed loans often feature better interest rates and terms compared to conventional loans from private banks or credit unions.
• No private mortgage insurance (PMI): Unlike conventional loans, VA loans do not require borrowers to pay for PMI, resulting in significant savings.
• Flexible credit requirements: VA loans typically have less stringent credit score requirements, making them more accessible to borrowers with lower credit scores.
• No penalty for early repayment: Borrowers who pay off their VA loan ahead of the loan term will not incur any prepayment penalties.

Eligibility for VA Loans

VA loans are available to current and former members of the Armed Forces, the National Guard, and, in some cases, their spouses. To be eligible, borrowers must meet specific service requirements and obtain a VA-backed home loan Certificate of Eligibility (COE). Additionally, they must intend to live in the home purchased with the loan.

USDA Loans

USDA loans are backed by the USDA's Rural Development program and are designed to assist individuals and families purchasing homes in qualifying rural or suburban areas. Here are some key features:

• No down payment: Similar to VA loans, USDA loans do not require a down payment, making them ideal for buyers who lack the funds for a large upfront payment.
• Competitive rates and terms: USDA loans offer attractive interest rates and terms, making homeownership more affordable for eligible borrowers.
• Income limits apply: To qualify for a USDA loan, borrowers must meet specific income limits, which are outlined per county by the USDA.
• Property location restrictions: The property must be located in an eligible rural or suburban area, as determined by the USDA.
• Annual fee and guarantee fee: While USDA loans do not require PMI, they do have an annual fee calculated monthly and included in the mortgage payment. Additionally, there is a one-time 1% guarantee fee collected at closing, which can be financed into the loan.

Eligibility for USDA Loans

USDA loans are available to individuals and families who meet the income limits and intend to use the property as their primary residence. The property must be located in a qualifying rural or suburban area, as defined by the USDA.

Frequently asked questions