First-time homebuyers have many questions, especially when it comes to making the down payment for their new home. One of the most common is, “How much should I save for a house down payment?” Unfortunately, there’s no one-size-fits-all answer. The fact is, the amount you put down depends less on how much you pay for the home and more on the type of mortgage you get.
A conventional mortgage, for instance, typically requires you to pay 3-5% down. So, if you purchase a home for $350,000, your down payment would be between $10,500 and $17,500. However, with conventional mortgages, which are backed by Fannie Mae or Freddie Mac, private mortgage insurance (PMI) is required when the down payment is less than 20% of the home’s value, which means you will pay an extra amount as part of your monthly payment. There are also some types of home loans — such as VA Home Loans or USDA loans backed by the government — that will allow you to purchase a home with up to no money down.
How Much Should You Save for a House Downpayment?
To determine how much down payment a first-time house buyer should save, you’ll need to have a good understanding of the several loan options available to you. Below is information on some of the most popular loans for first-time homebuyers and what you can expect to pay as a down payment with each one.
VA Home Loans
Military servicemembers and Veterans have access to the Department of Veterans Affairs (VA) Home Loan programs. VA Home Loans, or military home loans, like those offered through AAFMAA Mortgage Services LLC (AMS), are backed by the federal government to support homeownership in the military community. Those eligible for a VA Home Loan can purchase a new home with as little as no money down, though there are some financial benefits to making a down payment anyway.
There is no private mortgage insurance (PMI) on VA Loans, but a VA Funding Fee is required unless you qualify for an exemption from having to pay the funding fee such as a service-related disability or recipient of the Purple Heart. Because the government backs these loans, lenders may be able to offer low-interest rates that are highly competitive, and the VA Loans may have more flexible underwriting requirements such as 100% financing.
As we mentioned, depending on your situation you may be able to secure a conventional loan with a down payment of as little as 3% to 5% of the home’s cost. Most lenders will require you to pay for Private Mortgage Insurance (PMI) to offset your risk of default until you reach 20% equity in your home by making your regular mortgage payments over time, and/or the value of your home’s appraised value increases. PMI is usually charged on a monthly basis along with your loan payment, escrow and any additional fees rolled into the loan at closing.
Keep in mind that some lenders may require you to put down a higher percentage than 5% depending on your current credit score. A larger down payment is typically needed if you have a credit score below 640.
Even if your credit history needs repairing or building, homeownership may still be within your reach through the assistance of the Federal Housing Administration (FHA) loan program. An FHA Loan is a government-backed mortgage that typically offers those with credit challenges lower down payment and credit score requirements than conventional loans. You may be able to qualify with a credit score as low as 500.
Additionally, you can purchase a home using an FHA loan as long as you can pay at least 3.5% at the closing of the sale. These loans work like any other traditional mortgages you may get from a lender, meaning you’ll pay it back over the course of 15 or 30 years. Instead of paying for PMI, you will pay an upfront FHA funding fee, which can be financed into your loan, as well as ongoing FHA mortgage insurance premiums (MIP) based on your particular loan to protect against the higher risk of low down payment home loans.
Benefits to Making a Bigger Down Payment
While it can be a struggle for most first-time homebuyers to develop a large down payment for a new home, there are pitfalls to low down payment mortgages. Making a down payment of at least 20% obviously offers long-term benefits, but there are short-term benefits, too.
You Can Increase Your Buying Budget
Usually expressed as a percentage of the total purchase price, logically, having more money to put down means you can qualify for a mortgage on a more expensive property with the same income. But, aside from just buying a more expensive home, paying a larger amount upfront should lower your monthly mortgage payments and increase your buying budget.
Lower Interest Expense
As you make your loan balance smaller and decrease your mortgage rates with a larger down payment, you will also reduce the total amount of interest you have to pay over the life of your loan. The less you put toward a down payment, the more interest you will pay over the course of your loan.
Monthly Payments That Are Manageable
Reducing your loan balance, interest rate, and MIP or PMI all contribute to lowering your monthly payments. That can help make your mortgage payment less of a burden each month and allow you to better plan for your financial future.
How Do I Know If I Qualify for a Mortgage?
If you are a first-time homebuyer, you need to know what factors will help you qualify for a mortgage and prevent you from getting the home loan you need. Your credit score can impact whether or not you qualify for a loan. Most VA Home Loans and other government-supported loans do not have strict requirements for credit scores. Conventional loan lenders, however, will primarily base your loan terms on the strength of your credit history.
Your debt-to-income (DTI) ratio is another factor that will impact your ability to get a loan. Lenders will review how much debt you currently have and compare that to your annual income. The more debt you have, the more difficult it will be to get approved for a mortgage, especially one with a low down payment. By paying off some of your debt, you can help improve your debt-to-income ratio, and doing so may bring your credit score up as well.
Work with AMS to Find the Right Mortgage for You
AMS can help you find a mortgage that fits the unique needs of your family. For more information on how much down payment is needed to buy a house, contact us online or call (877) 387-6856 today.