What is a Good Amount of Money to Put Down on a House?
There’s a common misconception about buying a house. For some reason, many people believe they need to either put down 10 or 20%, but this simply isn’t true. Did you know that some loans only require 3%, or that some don’t even require one at all? Of course, it all depends on the loan and your credit score.
Why people believe in the 20% myth:
If a borrower doesn’t put down 20%, lenders charge what is known as private mortgage insurance, or PMI. PMI rates generally range from 0.3-1.2% of the loan amount, and the amount you pay each month depends on:
Your credit score
The size of your down payment
Loan type
Likelihood of your home’s appreciation and depreciation
Whether you will be renting the property or living in it yourself
For a $200,000 loan, the cost of PMI would be around $85 a month, or about $1,020 a year.
What down payment amounts you can make:
The minimum down payment you can make depends on the loan you get. Listed below are most common loan types available in the US, and their corresponding down payment amounts and required credit score.
FHA Loan: For a standard FHA loan, the minimum down payment amount is 3.5%. Therefore, a $200,000 house would require a down payment of $7,000. Minimum 580 credit score needed.
Conventional 97: If you’re a first time buyer, you need only make a 3% down payment for this loan. Depending on the loan amount, the minimum required credit score will range between 620 and 680.
HomeReady: 3% down for borrowers with low to moderate incomes. You don’t have to be a first time home buyer for this type of loan, but there are income limits. Minimum 620 credit score needed.
VA Loan: If you served or are currently serving in the US armed forces, you are eligible for 0% down payment with a VA loan. Don’t worry about a high rate, as VA loans are often considered to be the best loans on the market. Spouses also qualify. Minimum 620 credit score needed.
USDA Loan: For homes in select rural areas, borrowers can get away with 0% down. There are income limitations, and the homes are usually well outside of urban areas, but it is possible to find a USDA designated home that is within a short driving distance of a nearby city. Minimum 640 credit score needed.
Jumbo Loan: If you live in a high cost area, you may have to get a jumbo loan for an entry level home. Unfortunately, a jumbo loan requires a minimum of 10% down. In the San Francisco area, $679,650 is the maximum conventional loan you can get, so anything over that amount would require a jumbo loan. Minimum 720 credit score needed.
What to do if you can’t make the minimum down payment? Answer: Down Payment Assistance Programs
There are programs to assist home buyers with making down payments. Each program is different. Some are grants and others are loans.
Obviously you’ll want to look for programs that don’t require you to pay the money back. The National Homebuyer’s Fund is one organization that offers two down payment assistance programs that don’t require repayment. It’s not available nationwide, and there are certain requirements you have to meet, such as a minimum credit score, DTI, and loan amount (among a few other things). If you haven’t bought a house yet because you’re unable to save up for a down payment, this is the type of company you’ll want to look into.
Otherwise, just do a search of your state and locality with “down payment assistance program” (example, “Jacksonville Florida Down Payment Assistance Program”). Each state and county has its own, but do some digging and try to find one that doesn’t require you to pay back the amount.
Get out of the renting rut.
Living expenses rise every year, yet few people can claim their wages are keeping up. If you’re having trouble saving up for a down payment, it unlikely has anything to do with how well you manage your money. This why various loans and down payment assistance programs were invented—to help common, everyday people increase their standard of living.
Lately, the standard increase in value for a home has been $13,000 a year. That’s equity that can really work towards your favor one day. Maintain your monthly payments, build up your equity, and in a few years you could either choose to refinance to get a lower rate or sell your house and use the proceeds to actually make a 20% down payment on a house.
The choice is yours, but clearly buying makes more financial sense than renting.