While it’s long been the standing concept that you have to save up 20 percent in order to get a home loan, this is no longer true today. There are options now that include down payments as low as 3 percent, and certain buyers may even qualify for a zero down loan. Here, we’ll address the variances in down payment amounts by loan type and the benefits of putting down 20 percent when possible.
Considerations When Putting 20% Down on a Home
The requirements to put 20 percent down on a home for a conventional loan have loosened. As mentioned some can get loans with far less up front. However, if you don’t pay the 20 percent, you might need to invest in private mortgage insurance (PMI) for added security on the lender’s end.
Another drawback to paying less down is that lenders are likely to charge you a higher interest rate. You might also lose out on a home you’re interested in to another party willing to make that full 20 percent investment.
That being said, lets explore some benefits of putting 20 percent or more down on you home loan.
- Reduce Monthly Payments: Big down payments equal less money borrowed and put more equity into your home. Payments on a conventional loan will be less, or you might use the extra money to shorten the loan and reduce the time you pay.
- Avoid PMI: This insurance covers the lender if you default. Avoid this extra expense with 20 percent down.
- Lower Interest Rates: More money down means you’re less of a risk for lenders, so they’ll offer lower rates. Just a couple of points less in interest can equal tens of thousands of dollars on the average loan.
- Edge Out Other Buyers: Sellers tend to lean towards working with pre-approved buyers with a 20 percent down payment that indicates financial security. This can be invaluable in a hot home market.
Down Payment Minimums By Loan Type
Down payments vary depending on loan type, primarily the difference being whether it’s a private loan from a bank or a loan backed by the government. Let’s discuss these loans and deposit minimums.
Those buying a primary residence will ideally have 20 percent to put down, but lenders set their own guidelines. Some may only require 3-5 percent down, but typically only if the borrow has a good credit score of 620 and above.
The Federal Housing Administration (FHA) is a part of the department of Housing and Urban Development (HUD) and insures loans they offer, which means better deals for lenders and buyers. Those with credit scores of 580 or higher can often get loans with 3.5 percent down, while those with lower scores will need a minimum of 10 percent.
Loans from the office of Veterans Affairs (VA) are available to most veterans who served certain length-of-service requirements and were honorably discharged. VA loans often require zero down payment and are available to spouses of military vets who are living, deceased or disabled in many circumstances.
USDA Home Loans
The US Department of Agriculture (USDA) is similar to a VA loan in that you might not need a down payment to secure a home loan. However, these loans are intended to foster development in rural and suburban areas, so homes must be within such a zone to qualify for a zero down loan.
What Type of Loan is Right for You?
Depending on your circumstances, family situation, and income limitations, several types of loans are out there. Each loan has down payment fluctuations, so speak to a professional mortgage expert to discuss your options.