If buying a house is on your to-do list this year, you’re probably wondering how much money you need for a conventional loan down payment.
Many borrowers still believe that all home purchases require a 20% down payment. But that really depends on the type of loan you get.
This article will look at conventional mortgages and unconventional loan products and the down payment amount each requires.
What is a minimum down payment?
The term “down payment” refers to how much money you put towards purchasing a home. This amount is deducted from your home’s total purchase price, and your mortgage loan covers the remaining amount.
Your minimum down payment will hinge on the total home price and the type of mortgage you choose.
For example, FHA home loans have a minimum down payment of 3.5%, VA loans offer zero down payments to eligible service members, and some conventional mortgages require a minimum of 5% down.
It’s worth noting that down payments totaling less than 20% of your home’s purchase price will typically mean having to pay private mortgage insurance.
Conventional loan vs. FHA home loans
Two of the most popular mortgages available are FHA and conventional loans.
A conventional home loan can offer borrowers a mortgage without paying private mortgage insurance (PMI) depending on their down payment, but they can be more challenging to qualify for.
Conversely, FHA home loans are typically easier to qualify for and have more relaxed credit requirements, but they require borrowers to pay mortgage insurance regardless of how much money they put toward the home. And because the federal government guarantees FHA loans, they work with borrowers with lower credit scores. This makes FHA loans popular choices for many first-time homebuyers.
However, with a conventional loan, if you put 20% down toward your home, you can typically avoid paying private mortgage insurance. Additionally, conventional loans can require borrowers to have a minimum credit score of 620.
Do I really need to pay a 20% down payment?
A 20% down payment can make many potential homeowners feel like buying a home is impossible.
The good news is, you don’t have to. In fact, very few mortgage lenders require a 20% down payment to approve a loan.
However, while a 20% down payment may not be required, it can offer several advantages (and a few disadvantages) to prospective home buyers.
Benefits of a larger down payment
For most borrowers, the bigger their down payment, the smaller their monthly mortgage payments.
This is because your down payment reduces the amount of the mortgage principal. It can also help you get better interest rates. But those aren’t the only advantages of a larger down payment.
If you can put 20% down toward purchasing your home, you can typically avoid paying PMI.
Additionally, a sizable down payment help you build home equity faster than smaller down payments (this can come in handy if you plan to refinance your mortgage in the future).
How can I save for a down payment faster?
Saving up to purchase a house can be frustrating; it feels slow. But you can speed up your down payment savings in several ways, such as:
- Opening a dedicated savings account and setting up an automatic deposit each month.
- Opt for stay-cations or low-cost day trips instead of resort stays or other big-ticket traveling plans.
- Give your budget an overhaul and look for areas where you can reduce—or eliminate—expenses, like bringing your lunch to work or making your coffee instead of hitting a local cafe.
Down payment and your loan-to-value (LTV) ratio
The term “loan-to-value (LTV) ratio” refers to the ratio of your mortgage to your home’s value, and your down payment is a key factor.
Lenders calculate your LTV ratio by dividing your mortgage amount by the fair market value of your home. The smaller the down payment, the bigger your LTV, and vice-versa.
The LTV ratio is one of the tools used to determine a borrower’s risk and what mortgage rates a borrower can qualify for.
The higher your LTV, the higher interest rates you can expect to pay on your mortgage. Lower LTV means lower interest rates and the potential to avoid additional lending costs.
How much house can you afford?
One of the benefits of getting pre-approved for your mortgage is finding out how much house you can afford.
Mortgage pre-approval lets you know your maximum mortgage loan amount. The amount is based on the information you provided during the pre-approval process and includes items such as your income, employment information, credit history or credit score, any outstanding or ongoing debts—like credit cards or student loans, etc.
Most borrowers find their mortgage pre-approval is for a property costing between 2-2.5 times their gross annual income. So, for example, if you earn $75,000 annually, you could likely afford a home between $150,000 and $187,500.
Are you ready to apply for mortgage pre-approval? You can begin your application online.
Alternative low down payment home loan programs
Your mortgage specialist, like the licensed home loan specialists at Assist Home Loan, can help you explore the different low down payment programs like these.
FHA loans are “government-backed home loans.” The Federal Housing Administration (FHA) helps borrowers with lower credit scores buy homes—some with down payments as low as 3.5%. The FHA also offers home refinancing loans.
The U.S. Department of Agriculture guarantees home loans for borrowers interested in properties located in certain rural areas. USDA home loans offer zero down payment options.
Like the FHA, and the USDA, the Department of Veterans Affairs backs home loans for select military service members and eligible surviving spouses. VA home loans offer zero down payment options, and eligible borrowers can use this program multiple times. The VA also offers home refinancing loans.
Get in touch with Assist Home Loans to guide you through your pre-approval process.
While a 20% down payment will ultimately save you money in the long run, it’s not realistic for every family or every financial situation.
If you’re unsure which mortgage is right for you or would like to find out whether a low-down-payment mortgage is the right choice for you and your family, speak to the home loan specialists at Assist Home Loans today.
We look forward to connecting with you. Our experienced team is here to help you reach your financing goals.