If you spend a lot of time crunching numbers in your head trying to estimate what you’d need to save up for a down payment on a first home — you might just be spinning your wheels. That’s because there are a lot of myths and misconceptions out there about what’s really required for a down payment. For instance, if you think you’ll absolutely need 20% down to get a loan and get competitive on a home…think again.
The fact is, homeowners aren’t exactly chatting among friends in casual conversation about how much they put down on their house, so it’s hard to know what’s normal and what isn’t in housing markets around the country, and for buyers’ diverse situations. But it’s useful to know — and hear straight from the mouths of the pros — that the notion of 20% down is not a uniform requirement across the board, nor is it even the right choice for everyone.
Of course, when you’re buying a home, you’ll want to get educated and strategic about down payments. You want to make sure you don’t put down too low a down payment because you could end up overextending yourself on your monthly mortgage payment. At the same time, you don’t want to face the task of saving indefinitely for such a daunting down payment that it prices you out of the housing market entirely.
So what is a typical down payment on a home, and what should you plan to bring to the table? Here, we break down the facts with expert feedback to arm you with down payment intel you can use in your specific situation.
What was a normal down payment for first-time buyers in 2019?
Last year, 94% of first-time buyers got a mortgage loan, according to stats cited in the 2019 National Association of Realtors Home Buyers & Sellers’ Report. Of those, 19% financed the entire purchase with a mortgage loan; in other words, they put no money down at all.
In that group of 2019 buyers, 28% had a down payment of just 1% to 5%, and the median down payment among the whole group of first-time buyers was 6%.
In short, “There’s a lot of programs for first-time homebuyers,” says Toni Zarghami, a top-selling agent in the Sarasota, Florida area. So you have options when it comes to making a down payment that’s right for you.
What was a normal down payment for repeat buyers in 2019?
For repeat buyers in 2019, 82% got a mortgage loan, according to the NAR report; that means that 18% did not.
Among repeat buyers, 10% financed the entire purchase with a mortgage loan — so, that means they used no down payment at all.
In the group of repeat buyers in 2019, 15% put down just 1% to 5% of the home price.
Amid the whole group, the median down payment was 16%.
What will be a typical down payment in 2020?
So far, 2020 has…been a bit of a surprise, hasn’t it? Based on some recent changes in the mortgage industry driven by the coronavirus pandemic, we can guess that many buyers in 2020 may have to bring bigger down payments to the table than buyers in 2019.
The reason is lending risk and mortgage overlays. In riskier loan environments, lenders will increase the standards required to get a loan in order to protect themselves from the added risk. This means buyers will need higher credit scores and bigger down payments to get a loan, so some low-down-payment opportunities aren’t always available.
How do home buyers decide the down payment on a home?
So, it’s clear by now that the range of down payments varies significantly depending on the specifics of the buyer’s situation.
Depending on your own circumstances, here are some guidelines as to what you might expect to put down in combination with the type of loan that matches your personal homebuying profile.
0% down payment
If you’re a veteran, you might qualify for a Department of Veterans Affairs loan, or VA loan. And for this kind of loan, you don’t need to put anything down as long as the sales price isn’t higher than the home’s appraised value.
3% down payment
With 3% down payment, you’re looking at the starting amount typically required for conventional loans.
3.5% down payment
With a minimum credit score of 580, you can get a Federal Housing Administration (FHA) loan with a 3.5% down payment. The government backs these loans, made for homebuyers with low to moderate incomes.
10% down payment
With a minimum credit score of 500, you can qualify for an FHA loan with 10% down. Note that all FHA loans require mortgage insurance (conventional loans with low down payment require private mortgage insurance, or PMI). But if you put at least 10% down on your FHA loan, you qualify to get those mortgage insurance premium payments eventually lifted, instead of paying them for the entire term of the loan.
20% down payment
If you can put 20% down on a home, you’ll get out of paying PMI or mortgage insurance premiums, which can add up over time. And you’ll be on the road to substantial equity much faster, of course.
But 20% of your new home’s value might represent a huge chunk of your available finances. And there are certainly cons to shelling out that much. For instance, you should avoid putting 20% down if doing so will tie up all of your funds so you have nothing left for emergencies, let alone for furnishings or appliances essential to fill your new home.
How much down payment should you plan for?
According to the NAR report, 60% of buyers pulled their down payment from savings, while 38% percent of buyers cited using the proceeds from the sale of a primary residence. Overall, 13% of buyers found saving for that down payment to be the most difficult step in the homebuying process.
But if you’re worried about saving for a down payment — and confused about what it should even be — your best bet for determining your own right approach to down payment is getting with a local agent and lender and exploring specifics. You might find yourself pleasantly surprised at all the options available to you…and at how substantial the actual range is for a “normal” down payment.
“With an acceptable offer, sometimes sellers can even help you with your down payment, because they’ll give you a credit toward your closing costs,” Zarghami says.
Beyond that, she says, “There’s a lot of different ways to work it. The down payment does not have to come from your bank account — it can be gifted from friends or family members, or we can have sellers help out. So there’s a lot of different ways to go about it.”
There are a lot of different ways to go about it, indeed — and at a significant range of down payment amounts, from 0% to 20% or more.
Header Image Source: (fran hogan / Unsplash)