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What is a Down Payment on a House?
A mortgage down payment is the amount of money that is put up-front in the purchase of a home. It is a percentage of the total purchase price of the home. About 9 in 10 American home buyers use mortgage financing for the purchase of a home and most are required to provide a down payment.
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
Down Payment Options
Frequently Asked Questions
What is the Minimum Down Payment on a House?
The minimum down payment is the lowest up-front amount a home buyer must pay before purchasing a home. The minimum down payment is used to secure a mortgage by letting lenders know that you can financially support mortgage payments. The minimum down payment on a house is 20% of the total purchase price for general conventional loans. However, there are many situations where the minimum down payment amount varies due to the type of loan taken and if it is within conforming loan limits set by the Federal Housing Finance Agency. For example, first-time home buyers can have minimum down payments of as low as 3% through conforming loans like Fannie Mae’s HomeReady Program or Freddie Mac’s HomePossible Program.
Do I Need to Pay Mortgage Insurance?
Mortgage insurance is only required on loans if the minimum down payment is less than 20%. This insurance protects your mortgage lender if you fail to make your monthly mortgage payments. Mortgage insurance is meant to protect your lender and if you do not make payments, the lender can still repossess your home. No matter what mortgage you get, if the down payment is less than 20%, someone is paying for insurance. You will have to pay Private Mortgage Insurance (PMI) on conventional loans, FHA Mortgage Insurance Premiums (FHA MIP) on FHA loans, and reduced mortgage insurance on conforming loans. There are very few loan types that won’t charge insurance with a low down payment, but the USDA and VA insure their mortgages. If you get a USDA or VA loan, the insurance is covered by the government-sponsored agency supporting the loan. This means that your mortgage payment doesn’t include an insurance premium.
What is a Conforming Loan?
A conforming loan is a mortgage that falls within the purchase price limits set by the Federal Housing Finance Agency. These loans are insured by government-sponsored agencies like the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). The loans must have a loan to value (LTV) ratio of at least 80% and a debt to income ratio no greater than 43% to be considered conforming loans. If these criteria of loan size, loan to value ratio, and debt to income ratio are not met, then government agencies will not insure the loan, which can result in higher mortgage rates. If the loan is beyond the limit it is classified as a Jumbo loan and will require Private Mortgage Insurance in rare cases where the down payment is less than 20%.
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 which is $274,125 or 50% higher than the base limit. 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. It is important to note that different government home loan programs like those offered by the USDA use different loan limits.
How is the Minimum Down Payment Calculated?
Three factors that determine the minimum down payment you are required to pay:
- Location – Counties have different maximum mortgage amounts, so you will need a jumbo loan for properties within that county that exceed this limit.
- Home Price – The home sale price determines whether the loan is a conforming loan within the limit or a jumbo loan.
- Credit Score – The credit score is also used because certain loans cannot be offered below a certain credit score. Home buyers with low credit scores may have to use bad credit mortgages.
What is a First-Time Home Buyer?
A first-time home buyer is defined by the U.S. Department of Housing and Urban Development (HUD). According to HUD, you are a first-time home buyer if you fall into one of the following categories:
- You have not owned a principal residence in the past three years
- Purchasing a home with your spouse who has not owned a principal residence in the past three years
- Divorced and have only jointly owned a home with your former spouse
- A displaced homemaker who jointly owned a home with your spouse
- Owned a principal residence not affixed to a permanent foundation as defined by HUD
- Owned a home in volation of state, local, or model building codes
Minimum Down Payment for Different Types of Loans
If the home loan value is within conforming limits, these are the minimum down payments for the following 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:
FHA Loan – Minimum Down Payment of 3.5%
- 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. They are meant for veterans, military members, or their family members 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
There are no minimum down payment or minimum credit score requirements, but your lender may still consider your credit score when determining your creditworthiness.
USDA Loan - No Minimum Down Payment Required
The 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 home buyers 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. Down payment assistance programs are generally offered by first-time home buyer programs. There are over 2,500 different programs, so it is recommended to research 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. Many state-wide mortgage programs provide down payment assistance through local housing authorities backed by the FHA. 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:
- Grants – This is the best type of assistance because these funds do not have to be paid back. You will receive either a flat amount or a percentage of the home price as a one-time grant usually offered to first-time home buyers.
- 2nd Mortgage with Interest: This is an interest-based mortgage where the principal loan amount has to be paid back in addition to the original mortgage, resulting in higher monthly expenses. This mortgage is considered separate, but failure to fulfill the monthly payment amounts could result in the foreclosure of your home.
- Deferred 2nd Mortgage: The other type of homeowner’s second mortgage is deferred where the payment has to be made if you move, sell, or refinance. You do not need to make interest payments, but the full amount must be returned to the government if the mortgage is terminated.
- Interest-free loans – These loans have to be paid back but are interest-free. You should expect to make monthly payments like a 2nd mortgage, but monthly payments will be lower and all money used in the payments will repay the principal amount of the loan.
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 county, whereas moderate-income is less than 80% of the median income in the county. 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 – Your credit score should be at least 620, but if your credit score is lower than 620, you can check out FHA Home Loans, which only have a minimum credit score requirement of 500.
- 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. USDA home loans are only available for properties in designated rural areas.
- 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 to make housing more affordable for everyone.