On average, home buyers are putting down 12% of the home’s purchase price as a down payment, with first-time homebuyers putting down a mere 6%.
Does that mean that if you have saved up $18,000 you are ready to go out and purchase a $300,000 home by putting 6% down? Not necessarily.
How much does my down payment need to be?
The answer to this question, again, is not cut and dried. How much you need to put down on a home depends on the loan product that you are trying to use. VA loans or USDA home loans offer no-money-down options. If you don’t qualify for one of those loans, a down payment on an FHA loan, which the Federal Housing Authority backs, can be as little as 3.5%.
For certain loan products and conventional loans where you make a down payment of less than 20%, you are susceptible to having mortgage insurance added to your monthly mortgage payment.
What is mortgage insurance, and how do I get rid of it?
Mortgage insurance is an extra payment that a borrower is required to pay monthly in addition to the mortgage payment they owe their lender. It is designed to protect the lender if the borrower stops making payments and defaults on the loan.
For the time being, the only way that you can really avoid paying mortgage insurance is to make a down payment of 20% or more toward the home purchase.
Why and how your credit score factors in
Your credit score will affect the interest rate that you will be approved for, but it might also affect how much you need to put down.
If you are applying for an FHA loan and have a score over 580, you should be able to qualify with only a 3.5% down payment. However, if your score is under 580 and you can qualify for the loan, you will have to put down 10%.
What to consider when determining how much to put down on a home
There are a few main questions to ask yourself when deciding your down payment amount.
How much do you have saved?
How much will you have left after making the down payment? The last thing that you would want is to save up all this money, get settled into your home, and then have an emergency happen that you couldn’t afford to pay for because all of your money is tied up in your home.
Putting 20% down is probably not the best choice for you if it will leave you with little to nothing in your savings account afterward. Bite the bullet of taking on mortgage insurance and work toward getting to that 20% equity mark (in which case you’d be let off the hook for the mortgage insurance).
How long are you planning to live in the home?
The longer you plan on staying in the home, the more valuable each dollar of down payment becomes.
If you plan on living in the home for less than 10 years, then making a larger down payment may not be the best choice.
Are you an active investor?
With low mortgage interest rates, your down payment does not gain the greatest return on its money. That said, it is a guaranteed return on your money (whatever interest rate you get) that you can’t get almost anywhere else.
What size monthly mortgage payment can you support?
If you have a lot of money saved up for a down payment, but you don’t have enough each month to support a higher mortgage payment, then putting more of that savings down is a good idea. This is especially true if putting more down is going to save you from mortgage insurance.
As you can see, answering the question as to how much you should put down on a home is not the easiest thing to do. There are many variables that you need to account for to make the best decision for your specific needs. Hopefully, you now know at least a little more about down payments (and closing costs!) and can make a more informed decision.
If this is something that you are struggling with, I would advise that you seek out the opinion of a financial advisor or counselor who can help you navigate the process.