What to know about mortgage down payments

Is it true that you need a 20% down payment to buy a home?

Not necessarily.

However, it is true that there are benefits when putting 20% down on the purchase of your new home. But many people can’t afford to do that and opt to put down less.

How much should you put down on a new home? Here’s what you need to know when making that decision.

Some of the best advantages of putting down 20% of a home’s purchase price upfront are:

• The more money you put down upfront, the less you need to borrow and the lower your monthly mortgage payment will be.
• The less you need to borrow, the easier it can be to qualify for a mortgage.
• You may be eligible for more mortgage programs, as well as better interest rates.
• You won’t have to pay mortgage insurance (which protects the lender in case the borrower defaults on the loan). 

The only negative of putting 20% down on a home is the extra time and sacrifice it takes to save that amount of money. For example, saving $50,000 for a $250,000 mortgage can be a substantial obstacle. It’s not surprising that the average down payment is just 6% for first-time homebuyers and 14% for repeat buyers.

It’s still a good idea to aim high for your down payment fund, so create a savings plan to help you reach your target.

Meanwhile, you can also explore alternatives and assistance like the examples below:

• Many mortgage products allow you to use money gifted from family members (or others who are approved) to help finance your down payment. However, each lender and loan type have different rules, but most require a “gift letter” (from the giver) to confirm that the cash is, in fact, a gift and does not need to be paid back.
• Down payment requirements for Federal Housing Administration (FHA) loans can be as low as 3.5%. However, you’ll pay mortgage insurance, which typically involves paying an upfront mortgage insurance premium at closing, plus monthly premiums for the life of the loan.
• HomeReady^® mortgages have down payments as low as 3% and allow the use of gifts, grants, and certain other sources to help with your down payment. You’ll need to pay mortgage insurance for the lower down payment, but can usually cancel it once you have a certain amount of equity in your home (typically 20%).
• U.S. Department of Veterans Affairs (VA) Home Loans are for veterans, active duty personnel, reservists/National Guard members, and surviving spouses. VA loans require no down payment¹ and no mortgage insurance, and have limited closing costs.
• Many state, county, and city governments offer down payment assistance programs, including grants, loans, and tax credits. Check out the National Council of State Housing Agencies, the U.S. Department of Housing and Urban Development (HUD) online listing tool, and the National Association of Local Housing Finance Agencies for more information.

Sure, putting 20% down on a new home would be great, but it’s not realistic for a lot of folks. Do your best to build up your savings for your down payment so you can qualify for more programs and lower your monthly payments. Also, remember to keep your down payment savings separate from other savings (such as your emergency fund) and have extra left over for other home expenses like maintenance and furniture.

In some cases, it might make more sense to rent for another year or a few extra months to get your down payment fund in better standing. It could save you a substantial amount of money over the life of your home loan.

Saving for and buying a home is a big decision. Our dedicated colleagues can assist you through the process and help you reach your potential. To learn more about down payment assistance and low down payment options, and for personal assistance with finding the right mortgage, reach out to a Citizens Loan Officer.