Down Payment on a House: How Much Do You Need?

When buying a home, you'll be required to put up a down payment to cover a portion of the cost. Depending on where you live, how much money you have, and what type of loan you’re taking out for your home purchase loan, your down payment could vary substantially.

So how much down payment do you need?

To buy a house, you need a 12% down payment. However, it used to be normal for homebuyers to put 20% down. When you buy a house, you must go through the mortgage procedure with your bank or lender to be approved for the loan. 

Today, there are many available options for purchasing a house. Regardless of the options, you'll often need a down payment when you're buying a home. 

This article will show you how much down payment you need, the factors that determine your down payment, and the type of mortgage you can get.

What is a Down Payment?

What’s a down payment, exactly?  A down payment is what you pay to the bank upfront when purchasing the house. Your down payment will vary depending on your lender, but it can range anywhere from 3% to 20% of the total purchase price of the property. 

When you buy a house with cash or other non-borrowed funds, such as through inheritance, you won’t need to make a down payment.

Your Options for Making a Down Payment

When buying a home, you can choose between different options for making your down payment. You should consider each option before making your decision, or you could lose money in the long run.

Some people choose to save their money and use it as their down payment, while others withdraw the cash from an investment account or borrow money.

Factors That Determine Your Down Payment

You’ll typically need to put down 3%-20% as your minimum down payment when buying a house. This is the standard that most mortgage companies require when lending money for a home purchase.

However, there are circumstances where you can put down less than 20%. For example, if you choose to buy a house with your partner and combine your income and credit scores, it's possible to make a 10% down payment.

Let’s take a look at some of the factors that determine the size of your down payment.

Credit Score

Your credit score is an important part of the home-buying process. It shows lenders how good you are with money and your ability to repay any loans that you take out.

A high credit score will help you get a low-interest rate on your mortgage, which will save you thousands over the life of your loan. You can check this for free using sites like Credit Karma.

Money Available to Put Down

An amount equal to 20% of the house's final sale price is required as your down payment, with some exceptions. If you don't have enough money saved up, there are options available for borrowing cash. 

One option is through family or friends who may be willing to lend it to you. 

You can also use a cash advance on your credit card, but keep in mind that you’ll need to pay back this loan almost immediately, so it's best used as an absolute last resort.

The Type of Mortgage You Need

There are many options available for people with poor credit or who have no down payment saved up. Different mortgages have different requirements, but all are designed to help you get into a home even if you don't have the money required for a traditional loan. 

FHA Loans

With an FHA Loan, your down payment must be at least 3.5%. There’s also an additional fund known as MIP (Mortgage Insurance Premium), which must be paid when you close on your house and every year after that. 

Based on current interest rates, it typically costs 1%-2% of the total loan amount per year. You can decide if it's worth paying this fee to get your house, but the benefit is you only have to pay it for 11 years.

This option comes with a significant drawback, though.  FHA Loans are typically more expensive than traditional loans.

VA Loans

Like an FHA Loan, VA Loans require no down payment, but they also come with MIP paid every year. The nice thing about this funding source, though, is that military members can use their benefits while they're on active duty and don't have to worry about the money coming out of savings. 

They simply apply through their local lender and then reimburse themselves when they get home. No matter what option you choose, be sure to consult with a local lender and compare your options.

Remember, not all FHA Loans are created equal, so shop around or talk with a Veterans United loan specialist to find out how much you could save.

The Amount of a Down Payment Required

The amount of money one needs for a down payment when buying a house can vary depending on the type of loan that is used. Loans backed by the Federal Housing Administration typically require only 3.5% down, while VA loans don't require any money down.

Traditional home loans usually require 10% to 20%, but there are exceptions.  Some lenders will let buyers put as little as 3% down if they have excellent credit scores and other factors in their favor.

The downpayment is dependent on the type of mortgage you choose.

Benefits of Larger Down Payments

Larger down payments aren't always required, but they do come with specific benefits if you can swing a larger lump sum down.  A larger down payment means you'll have a smaller monthly mortgage bill and won't have to pay for private mortgage insurance, which protects the lender in case of foreclosure.

In other words, it’ll be cheaper to own your home with a larger down payment because your monthly costs are lower.  With a smaller loan balance, buyers also have an easier time qualifying for certain tax credits on their homes.

Finally, a nest egg can always come in useful during future emergencies or if you want to upgrade your house later on by selling it and using some of the money from the sale as a down payment on another property.

Conclusion

Buying a house is one of the biggest investments that any person will make in their lifetime. A down payment is often considered quite high when breaking down all of the costs involved in purchasing a new home. 

There are multiple factors that can affect your down payment, but it has been shown that buyers tend to put down an average of 12% to 20%.