Myth or Fact? You have to put 20 percent down on a house

Posted on Thursday, July 14, 2022 in Banking Information

Myth or Fact? You have to put 20 percent down on a house.

What is a down payment?

In real estate, a down payment is the amount of cash you put down upfront toward the purchase of a home. A down payment is expressed as a percentage. For example, if you are buying a home for $250,000 and put down $50,000 toward the purchase, your down payment is 20%. Similarly, if you put down $20,000, your down payment amount would be 8%.

Myth or Fact: Do you have to put 20% down?

You do not have to put 20 percent down on a house. In fact, the average down payment for first-time homebuyers is just 6 percent. And there are loan programs that let you put as little as zero down. However, a smaller down payment means a more expensive mortgage long-term. With less than 20 percent down on a house purchase, you will have a bigger loan and higher monthly payments. You will likely also have to pay for private mortgage insurance (PMI), which can be expensive.

Is it better to make a large down payment on a house?

When it comes to making a down payment, your decision should be based on your own financial goals. It is better to put 20 percent down if you want the lowest possible interest rate and monthly payment. However, it might be better to make a smaller down payment — say 5 to 10 percent down - if a larger down payment would drain your savings account.

What are the benefits of putting 20 percent down?

The biggest benefits of putting 20 percent down on a house are:

a smaller loan size
lower monthly payments
no PMI

What are the down payment requirements?

How much you need to put down on a house depends on your mortgage loan program. Common down payment requirements range from 3% to 20%.

A conventional loan is the most popular loan option. Conventional loan down payment requirements start at 3% minimum down with PMI. On that $250,000 house referenced earlier, that is a $7,500 down payment. However, you would need a 20% down payment to avoid paying PMI on a conventional mortgage loan.
Another low down payment option is the FHA mortgage program. FHA loans are guaranteed by the Federal Housing Administration. FHA loans require a 3.5-10% minimum down payment. A 3.5% down payment on a $250,000 home would be $8,750.
Some government-backed loan programs will allow you to buy a home with zero down. For instance, VA loans allow 0% down. However, you will still likely have to pay your closing costs upfront with cash. So even a zero-down program, you will be required to bring some cash to closing. VA loans are designed for active military, veterans, and some surviving spouses.

Bottom line

The right down payment depends on your goals and budget. Our lenders are happy to sit down with you and help find a plan that fits your needs. Stop in, or give us a call in Story City: (515) 733-4396 or in Garner at (641) 923-2801.

NMLS #552043

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