Do I need a down payment to buy a house? If you’re wondering whether it’s the right time to make the jump from renter to homeowner, you might ask yourself this question. Saving such a significant amount of money can be daunting, after all, and may push back your plans of buying a house. The answer depends on your specific situation and goals.
Do I Need a Down Payment to Buy a House?
Conventional wisdom is that you need a 20-percent down payment when purchasing a home. However, the reality is different. As The Mortgage Reports indicates, while a hefty down payment might have been a necessity in the past, smaller down payments have been on the scene since the Federal Housing Administration (FHA) launched its FHA loan program in 1934.
Defining the Down Payment
Do I need a down payment to buy a house? Before you can answer that question, you need to know what a down payment is.
As Zillow explains, a down payment is the sum of money a buyer hands over toward the purchase price when buying a home. This sum may come from savings, gifts, or even grants, and it is typically combined with a mortgage in order to reach a home’s total purchase price. Down payments are generally expressed as a percentage of the property’s purchase price. How much do homebuyers tend to put down? According to the National Association of Realtors, the average down payment in 2018 was 13 percent. Among first-time buyers, the average down payment was just 7 percent. In contrast, the average down payment from repeat buyers was 16 percent.
Down Payment Requirements
Home loans are not one-size-fits-all financial tools. There is a wide array of home loans available, and each has its own distinct requirements for the buyer, the property being purchased, and the down payment needed. In fact, there are programs that provide 100 percent financing, which means that no down payment is needed. According to an article published in The Mortgage Reports in October 2018, the minimum down payment requirements for most popular loan programs are as follows:
- VA loans require no down payment.
- USDA loans require no down payment.
- HomeReady loans require down payments of at least 3.0 percent.
- FHA loans require down payments of at least 3.5 percent.
Conventional loans don’t have standard guidelines for down payments. Although they vary by lender, most conventional loans require a down payment of about 5 to 15 percent (source). Some lenders offer conventional loans with a down payment requirement of just 3 percent. Typically, if a borrower puts down less than 20 percent, private mortgage insurance is required.
The Benefits of Making a Larger Down Payment
Even when a loan requires little or no down payment, some buyers choose to put down more than the minimum. Why would someone choose to do this? As The Street reports, making a larger down payment does have certain benefits:
- Lower Interest Rates: Lenders tend to view the ability to make a sizeable down payment as a sign of financial stability, so they generally offer borrowers who are making a larger down payment lower interest rates.
- Lower Total Costs: Securing a lower interest rate means that it ultimately costs you less to borrow money. Making a larger down payment reduces the amount of money that you’re paying interest on, which further reduces the total cost of your mortgage.
- A Competitive Edge: Sellers who want to close the deal prefer homebuyers with solid financing. In a competitive housing market, a sizeable down payment can make your offer more attractive.
The Advantages of Making a Smaller Down Payment
While the idea of minimizing debt by making a hefty down payment has its appeal, many homebuyers take a more conservative approach to putting money down. The Balance notes that there are advantages to making a smaller down payment:
- Less Wait to Become a Homeowner: For many would-be buyers, saving up enough cash for a sizeable down payment isn’t a quick sprint; it’s a marathon. Since it takes less time to put together a smaller down payment, you’ll be able to purchase a home sooner.
- Peace of Mind: Life happens. Depleting your savings in order to cobble together a large down payment can leave you without the financial resources you need to deal with emergencies like a health crisis, vehicle breakdown, or critical home repair. Putting down a little less allows you to maintain an emergency fund for when things go wrong.
- Reduced Opportunity Costs: When funds are committed to one venture, they are unavailable for use elsewhere, which can result in missed opportunities. Making a smaller down payment keeps your financial situation more fluid, which can reduce the opportunity costs associated with your home purchase.
So do I need a down payment to buy a house? Not necessarily. It will depend on your chosen loan and your personal goals.
At PrimeLending of Kansas City, we offer a wide variety of loan products and programs so that it’s easier for you to find one that suits your unique combination of needs and goals. Our knowledgeable loan officers are ready to answer your questions and provide you with friendly, personal attention, straightforward guidance, and excellent service. Contact us today to schedule an appointment.