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What is a Down Payment on a House?
Mortgage down payment is the amount of money that is put upfront in the purchase of a home. It is a percentage of the total purchase price of the home. For example, if the home price is $500,000, a 20% down payment is equal to $100,000, resulting in a total mortgage amount of $400,000 ($500,000 - $100,000). The average down payment in the US is about 6% of the home value.
Minimum Down Payment Calculator
Your Minimum Down Payment Options
Frequently Asked Questions
What is the Minimum Down Payment on a House?
The minimum down payment on a home is 3% of the total purchase price for conventional loans. However, the minimum down payment amount varies between the type of loan taken and if it is within conforming loan limits set by the Federal Housing Finance Agency.
What is a Conforming Loan?
A conforming loan is a mortgage that falls within the limits set by the Federal Housing Finance Agency, such that these loans can be insured by Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). The loans must also have a loan-to-value (LTV) ratio of at least 80% and debt-to-income (DTI) ratio no greater than 43% to be considered as conforming loans. If these criteria of loan size, LTV ratio, and DTI ratio are not met then government agencies such as Fannie Mae and Freddie Mac cannot insure the loan, which can result in higher interest rates. If the loan is beyond the limit it is known as a Jumbo loan and will require Private Mortgage Insurance.
For 2021, the conforming loan limit for most counties is set at $548,250 which is the base limit. In some high-cost counties such as New York City and Los Angeles, the limit is $822,375. Therefore, if your mortgage size in New York City is $1,000,000, it is not a conforming loan and is considered a Jumbo Loan.
How is the Minimum Down Payment Calculated?
There are three inputs to determine what is the minimum down payment that you can receive:
- Location – The location helps determine what is the loan limit for that specific area
- Home Price – The price determines whether the loan is a conforming loan if it is within the limit or a jumbo loan
- Credit Score – The credit score is used because certain loans cannot be offered below a certain credit score
Minimum Down Payment for Different Types of Loans
Conforming Loan – Minimum Down Payment of 3%
These loans can be insured by the federal government through sponsored agencies such as Fannie Mae and Freddie Mac. There are certain requirements to qualify for these loans:
- Minimum credit score of 620
- Loan-to-Value (LTV) Ratio of at least 20%
- Debt-to-Income (DTI) Ratio less than 43%
FHA Loan – Minimum Down Payment of 3.5%
FHA loans are insured by the Federal Housing Agency (FHA) and to be eligible you must meet the following requirements:
- Within the FHA Loan Limit
- Purchase of Mortgage Insurance Premium
- Debt-to-Income (DTI) Ratio of less than 43%
- Must be the Primary Residence
- Proof of Employment and Income
FHA loan limits have changed for 2021 - The base floor limit for most counties is $356,362 and for high-cost counties, the loan limit is $822,375. You can find the FHA loan limit for your county on the Housing and Urban Development page. These limits are not linked to conforming loan limits and FHA and conventional loans are independent.Find out more about FHA Loans
VA Loan – No Minimum Down Payment Required
VA Loans are insured by the Department of Veterans Affairs and to be eligible you must meet the following requirements:
- 90 days of active service during wartime
- 181 days of active service during peacetime
- 6 Years in the National Guard or Reserve
- Spouse of service member who passed in the line of duty
USDA Loan - No Minimum Down Payment Required
USDA Rural Development Guaranteed Housing Loan Program is insured by the US Department of Agriculture Mortgage Program and to be eligible you must meet the following requirements:
- Rural area - Population should be less than 20,000 individuals
- Income cannot be more than 115% of the median income. For example, if the median income is $50,000, to be eligible your income should be below $57,500 ($50,000 * 115%)
- Debt-to-Income (DTI) Ratio of less than 41%
- Home is used as the primary residence
- Acceptable credit history
Jumbo Loan - Minimum Down Payment of 20%
A jumbo loan is a conventional non-conforming loan. If a loan is beyond the local loan limits for your area, then it is considered a jumbo loan. Eligibility requirements for a jumbo loan:
- Credit score > 700
- Debt-to-income (DTI) ratio < 43%
- Cash reserves to cover 1 years' worth of mortgage payments
Down Payment Assistance
Down payment assistance programs help homebuyers with down payment and closing costs as it is a substantial portion of the upfront cost of purchasing a house. According to Forbes, 68% of renters are not purchasing a home because a large down payment acts as a barrier to a low rate mortgage. Down payment assistance programs vary by county, city and state which makes it difficult to determine which program is best. There are over 2,500 different programs, therefore it is recommended to do research in the area where the home is being purchased to determine which program best fits your needs.
These programs are eligible for most conforming loans such as FHA Home Loans, VA loans, and USDA loans. Conforming loans that are insured by Fannie Mae and Freddie Mac are also eligible for such programs. Conventional loans that are Jumbo loans are not eligible for these programs as they are above the limits for such programs.
Types of Down Payment Assistance Programs
There are 3 Different types of Down Payment Assistance Programs:
- Grant - This is the best type of assistance because these funds do not have to paid back
- 2nd Mortgage
- The first type is interest based where the mortgage has to be paid back with the original mortgage, resulting in higher monthly expenses
- The second type is deferred where the payment has to be made if you move, sell or refinance
- Interest-free loans – These loans have to be paid back but are interest free
Apart from these 3 types, there are also hybrid options where the second mortgage is forgiven after a certain period such as between 5 to 20 years. Down payment programs also have limits which in most cases is 5% of the home price, it can also be a dollar amount depending on the state. The borrower will still need to put up a certain amount as the down payment assistance program will not cover the full cost. However, down payment assistance programs can be a significant amount and should not be overlooked if you are low on cash.
Down Payment Assistance requirements
Although there are no hard and fast requirements, most programs follow a similar list of requirements:
- Income – Low to moderate-income earners are eligible for down payment assistance. Low-income earners are those whose income is less than 50% of the median income in the community, whereas moderate-income is less than 80% of the median income in the community. For example, if the median income in your community is $50,000 you would be considered a low-income earner if you earned less than $25,000 and a moderate-income earner if you earned less than $40,000.
- Credit Score – Credit score should be at least 620, if credit score is lower than 620 check out FHA Loans.
- Home Price & Location – The home price should be around the median home price in the area and certain areas are targeted over others such as low-income neighborhoods.
- Primary Residence – The home must be the primary residence of the party receiving down payment assistance and they must stay in the home for a specified number of years depending on the program
- First Time Home Buyer – Although there is no official rule, most programs help individuals who currently don’t own a home in order to increase the proportion of the population that owns homes.