Do I have to put 20% down on a house?

Buying a home can be a big and scary financial commitment, especially for millennials and first-time buyers.

You may have heard that purchasing a home requires a 20 percent down payment. This is not completely true and can vary depending on the type of loan and the cost of the home.

Keep reading to learn more about down payments and get the answer to the question, “Do I have to put 20% down on a house?” If you’re ready to act now, you can also apply for a mortgage pre-approval to start on your journey towards home ownership today.

Do I need a 20 percent down payment for a home?

The first question that often pops up in the mind of first-time home buyers is, “Do I need to pay 20 percent down payment?”. The answer is no. You do not need to pay 20% of the home price as down payment.

Many people believe that 20 percent is the necessary amount to secure a mortgage. This belief comes from outdated guidance. It’s true that lenders can often give better rates and terms to buyers who can pay 20% as a down payment. However, there are plenty of mortgage options available for those who can’t.

For instance, if you have good credit or are eligible for various homebuyer programs, you could qualify for loans with down payment options as low as 3.5% or even zero down payment options in some cases.

The upfront payment amount depends on various factors. These factors include your credit score, the type of property, the loan plan, and the lender’s specific rules. However, if you can’t afford 20% down, don’t feel disheartened. You can still own a home. There are options other than conventional mortgages that help homebuyers without large down payments.

What are the minimum down payment requirements for each loan type?

The minimum down payment for a home varies significantly depending on the loan type. Let’s look at some popular loan types to understand this better. A conventional loan, one of the most common types, often requires a down payment between 3% and 20%.

FHA loans*, which are insured by the Federal Housing Administration, are available with down payment options as low as 3.5%. That percentage can be quite an attractive option if you have a less-than-stellar credit score or are a first-time homebuyer without a hefty down payment.

Paying less upfront may result in higher monthly payments and mortgage insurance. Mortgage insurance is meant to protect the lender in case you are unable to repay the loan. It’s smart to consider your choices and think about the future effects before picking a loan with a lower down payment.

Can I apply for down payment assistance?

As a first-time or millennial home buyer, you might be wondering, “How can I come up with a down payment, regardless of its percentage?”. You’ll be pleased to know there are several down payment assistance (DPA) programs available. DPA programs help people who can pay for a mortgage but struggle to save for a down payment.

These programs can be in different forms like second mortgages, grants, or tax credits. Entities like government agencies and non-profit organizations offer these options.

However, like any other program or facility, DPA programs also come with their own set of qualifications and requirements. These programs assist low-income individuals in purchasing homes. There are specific regulations regarding the type of property and its location. It makes sense to research your options thoroughly and possibly seek advice from a financial advisor or a housing counselor before applying for down payment assistance.

Can I get a house without a down payment?

Yes, it’s possible to purchase a house without a down payment, or at least with a very minimal one. However, the options are limited.

Veterans can take advantage of VA loans*, which have down payment options as low as zero percent. The USDA loan program, administered by the United States Department of Agriculture, allows for zero down payment options for certain rural and suburban homes.

Smaller down payments may appear favorable, but they can lead to larger monthly mortgage payments. If you can’t pay 20% down, you may have to get mortgage insurance, which will increase your monthly housing cost.

Before choosing a mortgage without an initial down payment, it is crucial to consider all the expenses involved. It is also important to assess whether you can manage these costs effectively.

What are the benefits of a larger down payment?

Larger down payments can offer multiple benefits to homebuyers.

First, they can help you secure better interest rates. This is because your loan amount will be less, decreasing the lender’s risk. This means you could potentially save thousands of dollars over the life of your loan.**

Second, if you’re putting at least 20% down, you can avoid paying for private mortgage insurance (PMI). PMI typically costs between 0.5% to 1% of the entire loan amount annually, meaning it can add up over time. Lastly, a larger down payment reduces your monthly mortgage payment, helping you better manage your monthly expenses.

Remember, while these benefits are attractive, you should consider your full financial picture. Spending too much on your home can make it difficult to pay for repairs, improvements, or other financial goals.

This can create difficulties in managing your finances effectively. It’s important to strike a balance between investing in your home and allocating funds for other financial needs. By doing this, you can make sure you have enough money for unexpected costs or to achieve other financial objectives.

What are the potential risks of a lower down payment?

While many programs allow for a lower down payment, it’s important to understand the potential risks. First, as mentioned earlier, you’ll likely have to pay for PMI until your loan-to-value ratio reaches 80%. This can add a significant expense to your monthly mortgage payment.

In addition, a lower down payment means a larger loan amount, which can result in higher monthly payments. This could potentially stretch your budget thin, especially if unexpected costs arise.

Also, if home prices decrease, you could potentially owe more on your mortgage than your home is worth if you’ve made a smaller down payment. If you can keep paying each month and want to stay, it’s not a problem. However, this can create a problem if you want to sell or refinance.

How can I save for a down payment?

Regardless of the percentage, saving for a down payment is a crucial step in the home buying process.

Create a budget to ensure you can regularly set aside funds towards your down payment. It can help to have a separate savings account for this purpose.

Consider automating transfers from your checking account to your savings account to ensure regular contributions. You can check out programs or get gifts from family to boost your savings for the down payment.

It’s also critical not to neglect other costs associated with buying a home. These may include closing costs, moving expenses, home inspections, and any immediate repairs or updates the property may require. Make sure you have a buffer to cover these and other unforeseen expenses.

How can I apply for a mortgage pre-approval?

Do you have a down payment in mind already or are you planning to save for one? Whether you’re ready today or in a few months, the team at Owning can help.

If you have 10 minutes and know some basic information, you can start the mortgage pre-approval process right now.

A pre-approval helps you understand how much you could get approved for. A mortgage pre-approval also shows sellers and agents that you’re a serious buyer. Start the process today and begin your journey towards owning a new home!

Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Restrictions may apply, contact Owning for current rates and for more information.

All information provided in this publication is for informational and educational purposes only, and in no way is any of the content contained herein to be construed as financial, investment, or legal advice or instruction. Owning does not guarantee the quality, accuracy, completeness or timelines of the information in this publication. While efforts are made to verify the information provided, the information should not be assumed to be error-free. Some information in the publication may have been provided by third parties and has not necessarily been verified by Owning.

Owning its affiliates and subsidiaries do not assume any liability for the information contained herein, be it direct, indirect, consequential, special, or exemplary, or other damages whatsoever and howsoever caused, arising out of or in connection with the use of this publication or in reliance on the information, including any personal or pecuniary loss, whether the action is in contract, tort (including negligence) or other tortious action.

* Owning, Inc. is a private corporation organized under the laws of the State of Delaware. It has no affiliation with the US Department of Housing and Urban Development, the US Department of Veterans Affairs, the US Department of Agriculture, or any other government agency.

** Savings, if any, vary based on consumer’s credit profile, interest rate availability, and other factors. Contact Owning, Inc. for current rates. Restrictions apply.