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Buying a home will probably be one of the largest purchases you ever make, so it's important to understand exactly what goes into it.
Unless you have enough money saved up to purchase a house completely upfront and in cash, you'll have to take out a home loan — also known as a mortgage — to borrow enough money to pay for it.
If you're taking on a mortgage, you'll need to make what is known as a down payment, which is a lump sum of money that gets paid upfront when you're buying a home. While the down payment is typically a portion of the home's total value, the mortgage or home loan is meant to cover the remainder of the home's value.
Below, Select takes a closer look at how much of a down payment you should be prepared to make, and what to do if you can't afford to put down too much.
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How much of a down payment should you make?
The amount of the down payment you end up making will depend largely on the type of home loan you choose.
FHA loans, for example, have a minimum down payment requirement of 3.5% of the home's value. A conventional loan, on the other hand, typically requires a down payment of 5% to 20% of the home's value, while those who qualify for a VA loan can actually make a down payment of 0%.
Jumbo loans, however, have much higher down payment minimums — usually 10% or 20% — since these types of loans are meant for people who need to borrow significantly larger amounts of money. Ally Bank and Rocket Mortgage are two lenders that offer jumbo loans; check out this article for additional options.
Making a large down payment can actually pay off in the long-run. The larger your down payment is, the less money you'll have to borrow through a home loan, which, in turn, can mean your monthly payments are lower, the amount of total interest you have to pay will be smaller, and you'll have more space in your budget for savings or other expenses.
Rocket Mortgage
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Annual Percentage Rate (APR)
Apply online for personalized rates
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Types of loans
Conventional loans, FHA loans, VA loans and Jumbo loans
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Terms
8 – 29 years, including 15-year and 30-year terms
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Credit needed
Typically requires a 620 credit score but will consider applicants with a 580 credit score as long as other eligibility criteria are met
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Minimum down payment
3.5% if moving forward with an FHA loan
Terms apply.
What if you can't afford to make a large down payment?
Making a lower down payment does present some advantages, allowing you to reserve more of your savings for closing costs, lender fees, renovations that may need to be done on your new home or other moving-related expenses.
It's also important to keep in mind that the larger your down payment is, the more equity you'll have in your home right off the bat. Traditionally, homebuyers have been encouraged to put down at least 20% on their home purchase, although nowadays making a lower down payment is more common, and allows homeownership to be accessible to more people.
If you do decide to make a down payment of less than 20%, just be aware that you'll have to pay extra each month for private mortgage insurance, or PMI, until you've built up 20% equity in the home.
Select identified mortgage lenders that offer additional options for people who want to make a smaller down payment.
Chase Bank offers the DreaMaker loan, which allows homebuyers to make a down payment as low as 3% of the home's value as long as they adhere to stricter income requirements.
Another lender, Navy Federal Credit Union, is especially appealing to those who qualify for a VA home loan, which carries a down payment requirement of 0%.
Chase Bank
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Annual Percentage Rate (APR)
Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included
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Types of loans
Conventional loans, FHA loans, VA loans, DreaMaker℠ loans and Jumbo loans
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Terms
10 – 30 years
-
Credit needed
-
Minimum down payment
3% if moving forward with a DreaMaker℠ loan
Terms apply.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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