How Much Do You Need For A Down Payment?
Posted by Jason Kauffman on September 6, 2022
One of the most common questions we get from first time homebuyers and even repeat homebuyers is How much do I need to come up with for a down payment. Like most things, the answer is that it depends. Many buyers want to minimize their down payment, so that is what we are going to focus on here.
The first thing for a mortgage professional to determine is how much a buyer has access to for down payment. Even if you are trying to minimize your down payment, the difference in the amount you qualify for could change dramatically if you have access to 5% versus only having access to a few thousand dollars. Knowing the maximum up front will allow us to present as many options as possible.
We’re going to break this guide up into a few sections – low down payment loan programs and down payment assistance programs.
Low Down Payment Program – Conventional
There are quite a few low down payment loan programs and we’ll touch briefly on them. The most common low down payment options are going to be the HomeReady Program (Fannie Mae), Home Possible Program (Freddie Mac), and FHA Loans.
The HomeReady and Home Possible loan programs are offered by Fannie Mae and Freddie Mac. Both of these programs have a minimum 3% down payment requirement (with caveats), reduced mortgage insurance, and rate adjustment caps that tend to result in a more competitive monthly payment. While these HomeReady/Home Possible programs themselves have a minimum credit score of 620, they tend to have lower payments than FHA financing for people with credit scores at 680+. Below a 680 credit score the payments on FHA converge and tend to be lower.
The most important caveat to the HomeReady and Home Possible programs is that they are income restricted – meaning that you can’t earn more than a certain amount per year. Currently the guidelines dictate that you have to make 80% of the area median income (AMI) based on the property’s location. Each program has an income limit lookup tool on Fannie/Freddie websites to check specific property eligibility.
There is also a 3% down payment program for Fannie Mae and Freddie Mac that doesn’t have income restrictions, but this program (compared to the HomeReady and Home Possible programs) has higher rates, higher mortgage insurance rates, and requires the borrower to be a first-time home buyer.
As you can see, there are many conventional financing options with 3% down payment. There are caveats to each of these programs and checking with a mortgage professional to see which option you fit into is suggested.
Low Down Payment Program – FHA
FHA financing remains one of the most flexible and affordable low down payment programs available. The minimum down payment required for FHA purchases is 3.5% (with a few minor caveats), and the interest rates tend to be lower than conventional interest rates. The monthly mortgage insurance on FHA loans is fixed regardless of credit score. The downsides to FHA are the upfront mortgage insurance premium and lifetime monthly mortgage insurance for loans with less than a 10% down payment.
For many borrowers though, FHA financing is the best option (sometimes the only option).
Low Down Payment Program – USDA
USDA financing is a great option for no down payment financing. There are different types of USDA financing, but the most common is their Single Family Housing Guaranteed program. This program allows you to borrow 100% of the purchase price and has competitive rates. The largest barrier of entry to getting a USDA loan tends to be that the USDA has very specific rurally designated areas that the property has to be a part of. There are also income limits based on household size that can disqualify you from the program.
Finding a mortgage professional that is familiar with the USDA process is critical because part of the process requires submitting the file to be reviewed by the nearest USDA Service Center.
Low Down Payment Program – VA
VA Home Loans are a benefit afforded only to Servicemembers, Veterans, and eligible surviving spouses. It is a benefit that is earned and there are specific eligibility guidelines that have to be met to exercise the benefit. If eligible, VA loans afford borrowers the ability to purchase a home with no money down, no mortgage insurance, and competitive rates.
Down Payment Assistance Programs
Down payment assistance programs have a tendency to be available regionally to borrowers. Most of the time these are City and County based programs specific where you live. This makes finding the available programs a little harder. We have integrated some DPA programs into our state specific category to help provide consolidated information based on the state in which you are looking to buy.
These programs are almost always income restricted. Sometimes they require that you are a first-time homebuyer but not always. Generally, homebuyer education is required. Check out our resources and reach out to your mortgage professional to see what programs are available in your area.
Down Payment Wrap-Up
As you can see, the answer to how much of a down payment you need is really going to be dependent on the loan program you and your mortgage professional select. Everyone’s situation is different so there is no simple one size fits all approach. You’re taking the best first step in gaining a better understanding of your options with this guide.