Down Payment on a House

One of the biggest challenges that many home buyers face is saving enough money for a down payment. A down payment is the amount of money that you must deposit upfront when you buy a home with a mortgage loan. It is usually expressed as a percentage of the final sale price. The amount you put down also affects your loan amount, interest rate, monthly payment, and mortgage insurance.
 
How much of a down payment you need depends on several factors, such as the type of loan, the lender, the property, and your credit score. While some people may think that they need to save 20% of the home price for a down payment, there are many options that let you put down much less – or even nothing at all. Here are some of the most common down payment options for home buyers and their pros and cons. capital, and collateral. Read below to understand what each of them means and why they matter.

Conventional loans

Conventional loans are mortgages that are not insured or guaranteed by the federal government. They are offered by private lenders, such as banks, credit unions, and mortgage companies, and they follow the standards set by Fannie Mae and Freddie Mac, two government-sponsored enterprises that buy and sell mortgages.
 
Conventional loans typically require a minimum down payment of 3% to 5% of the home price, depending on the lender and the loan program. For example, a 3% down payment on a $500,000 home would be $15,000, while a 5% down payment would be $25,000.
 
While many homebuyers don’t want to tie up all their liquid cash in their home, they should be aware that they’ll pay a premium for putting down less than 20%. When you put down less than 20%, you will have to pay for private mortgage insurance (PMI), which is an extra fee that protects the lender in case you default on the loan. PMI can cost between 0.5% and 1% of the loan amount per year. It can often be canceled once you reach 20% equity in your home.
 
The benefits of conventional loans are that they have lower interest rates and more flexible terms than some other loan types. They also have fewer restrictions on the property and the borrower, and they typically do not have any upfront mortgage insurance premiums. However, the drawbacks are that they have stricter credit and income requirements, and they may have higher closing costs and fees than some other loan types.

Tips & Facts

While some people may think that they need to save 20% of the home price for a down payment, there are many options that let you put down much less.

FHA loans

FHA loans are mortgages insured by the Federal Housing Administration, a branch of the Department of Housing and Urban Development. They are designed to help low- and moderate-income borrowers, especially first-time home buyers, to purchase a home.
 
FHA loans require a minimum down payment of 3.5% of the home price if you have a credit score of at least 580. If your credit score is between 500 and 579, you will need a 10% down payment. Regardless of your down payment amount, you will have to pay for two types of mortgage insurance: an upfront mortgage insurance premium (UFMIP), which is 1.75% of the loan amount, and an annual mortgage insurance premium (MIP), which ranges from 0.45% to 1.05% of the loan amount per year. Unlike PMI, MIP cannot be canceled unless you refinance to a conventional loan.
 
Refinancing has its own credit and income requirements and also depends on the current interest rate market. If your current interest rate is below what you can get by refinancing, then you’ll have to keep paying MIP.
 
The benefits of FHA loans are that they have lower credit and income requirements, and they allow for higher debt-to-income ratios than conventional loans. At times, they may also have lower interest rates than conventional loans. However, the drawbacks are that they have higher mortgage insurance costs. They also have more restrictions on the property and the borrower, such as limits on the loan amount and the types of homes that are eligible.

VA loans

VA loans are mortgages that are guaranteed by the Department of Veterans Affairs. They are available to eligible service members, veterans, and surviving spouses who meet certain criteria, such as serving a minimum period of active duty or being discharged under honorable conditions.
 
VA loans do not require any down payment, if the loan amount does not exceed the VA’s loan limit, which varies by county and ranges from $766,550 to $1,149,825 in 2024.
 
However, you will have to pay a one-time VA funding fee, which is a percentage of the loan amount that helps cover the cost of the program. While most veterans typically pay 2.15%, this fee can range from 0.5% to 3.3% depending on your type of service, your loan type, and your down payment amount. The VA funding fee can be paid upfront or rolled into the loan amount, and it can be waived or reduced for certain borrowers, such as those with a service-connected disability or those receiving VA disability compensation.
 
The benefits of VA loans are that they do not require any mortgage insurance, and they have lower interest rates and more flexible terms than conventional loans. They also have more lenient credit and income requirements, and they do not have any prepayment penalties or minimum credit score requirements. However, the drawbacks are that they have a limited pool of eligible borrowers. They also have more restrictions on the property and the borrower. For example, your home must be your primary residence, and it must meet the VA’s minimum property requirements.

USDA loans

USDA loans are mortgages that are guaranteed by the Department of Agriculture. They are designed to help low- and moderate-income borrowers, especially those who live in rural and suburban areas, to purchase a home.
 
USDA loans do not require any down payment, if the loan amount does not exceed the USDA’s loan limit, which varies by county and ranges from $377,600 to $970,800 in 2024.
 
However, you will have to pay for two types of mortgage insurance: an upfront guarantee fee, which is 1% of the loan amount, and an annual fee, which is 0.35% of the loan amount per year. Both fees can be paid upfront or rolled into the loan amount, and they cannot be canceled unless you refinance to a conventional loan.
 
The benefits of USDA loans are that they have lower interest rates and more flexible terms than conventional loans. They also have more lenient credit and income requirements, and they allow for higher debt-to-income ratios than conventional loans. However, the drawbacks are that they have a limited pool of eligible properties. There are also more property restrictions. Also, the home must be your primary residence, and it must be located in a USDA-eligible area. Borrowers also have to meet the USDA’s income requirements.

Down payment resources for first-time homebuyers in California

First-time homebuyers can face an uphill battle when it comes to buying a home – especially in a high cost-of-living state like California. Fortunately, there are first-time homebuying programs that can help.
 
These programs often provide down payment assistance, which means you’ll receive money you can use toward the down payment. Down payment assistance can come in two forms: grants and loans.
 
A grant will not have to be paid back, as long as you meet the specific requirements. A loan will have to be paid back, but you can often delay that until you sell the home.