How Large Should Your Real Estate Down Payment Be?
The elusive down payment. ACK! Sounds scary, right? When it comes to financing a home purchase, one of the biggest questions buyers ask is: how much money should I put down up front? It’s not complicated, and it’s really not that scary, but the answer depends on a lot and is different for each buyer.
What is a down payment?
When you purchase a house, you will likely use two main funding sources – a mortgage and your own bank account. The down payment is the amount that comes straight from your account. This amount is usually expressed as a percentage. So, if you purchase a $200,000 home and put down 10 percent, you will be paying $20,000 yourself and financing the remaining $180,000 through a mortgage.
Since your down payment is made with your money, the amount represents your equity in the home, right off the bat! The more you put down, the larger your ownership stake in the house, right from the start.
How much should you put down when purchasing a house?
The amount that you will need to put down will ultimately depend on your own financial situation and your desired monthly mortgage payment. To be sure that you don’t incur any fees and build a good amount of equity in your home from day one, a down payment of 20 percent is usually recommended. Generally, the more money you put down up front, the lower your monthly payments will be to pay off the loan.
However, if you prefer to keep some money in your bank account, there are some mortgage options that allow you to put down less than 20 percent. You can obtain a conventional mortgage with as little as 5 percent down and an FHA loan with as little as 3.5 percent down. However, it should be noted that there will be some fees attached to these lower down payments and you’ll need to be rocking an excellent credit score in order to be approved. A lower down payment makes you more of a risk in the eyes of the lender. So, they’ll make you pay in fees – handsomely. Oh, and those fees are on top of the already higher interest rates you’ll likely be slapped with.
Home buyers who are eligible for a VA loan or USDA loan can potentially purchase a house with zero dollars down. Wait… what?! It’s true. These loans can be obtained from most financial institutions and are backed by the VA and USDA respectively. Though you won’t be required to obtain mortgage insurance, you’ll need to pay a guarantee fee when closing on one of these loans. Keep in mind, these loans come with specific eligibility requirements (like past or active military service) or may only be offered in certain rural regions.
How much money do most people put down when buying a house?
As you might expect, down payment size can vary pretty wildly from location to location. Having said that, the National Association of Realtors’ Profile of Home Buyers and Sellers reports that the median down payment for buyers in the United States in 2019 was 16 percent for Repeat Homebuyers. Among First-Time Homebuyers, this figure drops to 6 percent. One easy-to-forget caveat is that the down payment isn’t the only time you’ll have to cough up your own cash during the home purchasing process – there are closing costs, earnest money and a few ‘hidden’ costs to consider as well.
There are no real right or wrong answers to questions about down payment size. Your answer will depend on your financial situation, your willingness to pay fees to lower your down payment, your ideal monthly mortgage payment, and your eligibility for VA or USDA loans.
So, how do you feel about YOUR down payment? Still scared? If you have questions, talk to your local real estate professional or lender.