Think You Need a 20% Down Payment To Buy a Home? Think Again
Published: June 25, 2024
Think You Need a 20% Down Payment To Buy a Home? Think Again
If you’ve ever considered buying a home, one of your first thoughts has probably been the amount of cash you need to save for a down payment. There are plenty of myths out there about the homebuying process, but few are as prevalent as the belief that you need to put 20% down to buy a home.
Below, we’ll explore the ins and outs of down payment requirements, whether you need to pay a 20% down payment to buy a home, how different down payment amounts can impact your mortgage payment, and some tips to help you get some help towards your down payment.
Do You Really Need a 20% Down Payment to Buy a Home?
The short answer: no.
The long answer is still no, but a down payment that’s less than 20% could add an additional cost to your monthly mortgage payment. Before we get into that, let’s first cover down payment minimums.
Different loan types come with different down payment minimums. And no, none of those minimums are 20%! In the bullets below, you can see the minimum down payment for the four main loan types:
- Conventional Loans: These are the most common mortgages, and the minimum down payment can vary from 3% to 5%. However, a down payment of less than 20% means you will have to pay private mortgage insurance (PMI), which protects the lender in case of default. The amount you pay in PMI depends on your loan and down payment size, and once your loan balance drops beneath 78% of the home's value, your lender will cancel your monthly PMI payment.
- FHA Loans: Backed by the Federal Housing Administration, FHA loans are designed for first-time homebuyers and those with lower credit scores. The minimum down payment for an FHA loan is only 3.5%.
- USDA Loans: The United States Department of Agriculture offers loans for rural property purchases. Here, you can potentially qualify for a 0% down payment, making homeownership extremely accessible in eligible areas.
- VA Loans: VA loans are a fantastic option for veterans, active-duty service members, and their spouses. These loans require no down payment, but there are funding fees associated with them. You can read this for more on the intricacies of VA loans.
Now that you know that the minimum down payment for any type of mortgage is significantly less than 20%, let’s talk about the most common down payment amount for specific types of homebuyers.
What’s the Average Down Payment on a Home?
It all depends on what kind of homebuyer you are.
The homebuying process is not a one-size-fits-all process. Different buyers have their own unique set of financial needs and desires for their homebuying process. That being said, we sourced some national averages for down payments to help you see that a 20% down payment is more uncommon than you might think.
- First-Time Homebuyers: The average down payment for first-time homebuyers is around 6% to 7%. Many first-time buyers take advantage of lower down payment options available through FHA, VA, and USDA loans, as well as certain conventional loan programs.
- Repeat Homebuyers: Those who are already homeowners tend to put down more, averaging around 12% to 16%. This higher percentage is often due to the equity they've built up from previous homes which enables them to make larger down payments.
While these average and median down payments are most common, the perfect down payment is the down payment that works best for your unique financial situation. If you have any questions about what your down payment could look like, don’t hesitate to reach out for some expert insight.
Down Payment Assistance Programs and Grants
Need help with your down payment? You have some options.
Coming up with a lump sum to pay your down payment is one of the biggest obstacles preventing many first-time buyers from fulfilling their dreams of homeownership. Fortunately, there are numerous programs and grants available to assist with down payments. These programs can significantly reduce the financial barrier to homeownership:
- State and Local Programs: Many states and local governments offer grants or low-interest loans to help cover down payments and closing costs. These programs often cater to first-time buyers and those with moderate incomes. My team has helped buyers use state and local programs in the past, so feel free to reach out for guidance.
- Federal Programs: The Department of Housing and Urban Development (HUD) offers several programs. You can visit hud.gov to see what’s available in your area. Just like the state and local programs, feel free to reach out for some guidance on your options.
- Lender-Specific Programs: At UMortgage, we have several down payment assistance programs available, including grants, deferred payment loans, and forgivable loans that can help reduce the initial cost of buying a home. If you’re interested in learning more details about my options for you, don’t hesitate to reach out.
I hope this blog helped you realize that the idea of a 20% down payment being necessary to buy a home is a myth. Most homebuyers buy with less than 10% down. By understanding the true requirements and available resources, you can make informed decisions and take the first steps toward buying your home.
If you feel like a down payment is standing between you and your dreams of homeownership, let’s connect! I have plenty of options that can make homeownership significantly more affordable for you and your family.