What Are The Down Payment Requirements to Purchase a Home

Real Estate Agent with RE/MAX Executive Realty 91362

How Much Down Payment Do You Need to Buy a Home

Are you saving to buy your first home? One of the most commonly asked questions among potential home buyers is how much do I need for a down payment. When it comes to down payments, there has been a significant amount of false information floating around for years.

So many first-time buyers are under the false impression that a twenty percent down payment is necessary. Needing this kind of down payment is completely false. The resource at Maximum Real Estate Exposure does a solid job of explaining what you need to know about down payments.

Finding the down payment to purchase a home can often be difficult, particularly when some people may suggest you need twenty percent. There are first-time buyer mortgage options that allow you a smaller amount as a down payment. What many people are shocked to hear is that it's possible to buy a home with zero money down.

Where to Find the Money?

Finding more money for the down payment is going to be better for homebuyers in the longer term. It will lead to lower interest rates, but it can be challenging to secure. If you don't already have the money saved up, there are other options.

  • Family money. If there is some sort of loan or gift available from your family, this can make things easier. Here is a helpful guide from Quicken loans on what you need to know about using down payment gift funds.
  • Withdrawals from financial products. If you have a retirement fund or 401K, you could think about taking some money out of that to cover a down payment. There can be penalties for doing this, but there is an exception for first-time buyers of $10,000.
  • Another loan. You could think about taking out a loan to cover the payment, but some lenders won't allow this. It can also increase or prevent you from qualifying for the mortgage as your debt to income ratio will get less desirable.
  • Selling assets. If you have anything which could be worth thousands, now could be the time to get rid of it to give you more money.

Homebuyer Grants

Lots of first time home buyers wonder if there are any other ways they can get financial assistance. The Department of Housing and Urban Development has a program to help out first-time buyers. If you meet their requirements, you could receive a grant; however, not every mortgage lender will be happy lending to you in this situation.

Reduced Down Payment Lenders

Most lenders today are happy with a lower down payment than the more traditional twenty percent. You will still need to have enough income to safely cover the payments, so you need to make sure you aren't stretching your finances. Potential first-time homeowners should be spending ample time in advance of their purchase, getting the financial house in order.

Some companies actually help borrowers get themselves into a better financial situation. One well-known company is Credit Karma. Credit Karma provides free credit checks and monitoring, as well as giving you pointers on where you can better yourself financially.

Many potential home buyers also don't realize they can get a free credit report once a year. Doing so is just plain smart. It is not uncommon at all for there to be mistakes in your credit report that could negatively impact your ability to get the best terms and rates when getting a mortgage.

Use FHA For Lower Down Payment

One of the most popular types of loans many first time borrowers will use is an FHA mortgage. The Federal Housing Administration offers loans with a minimum of 3.5 percent down. You will have to pay mortgage insurance each month, however, though this can be added to the loan.

Use a VA If You Have or Are Serving in The Military

The Veterans Affairs Department of the Government also has offers for former or current military personnel. Their requirements start from as little as nothing. If you qualify, they offer a zero percent down mortgage, which can't be beaten.

Traditional Lenders Also Have Low Down Payments

If you don't qualify for either of the Government programs, there are other options available from conventional lenders. While you won't usually find offers as good as zero percent, you could discover requirements for as little as 3 percent down. You are going to need a good credit history in order to qualify for these, though.

The Reason For 20 Percent Down Payments

As you can see, there are more options to avoid the need to meet the twenty percent figure. The reason lenders like this amount is because they believe it means that the homeowner is less likely to default. The thinking is that since you have more invested in the property, you will work harder to make sure you don't fall into a foreclosure situation.

With less of a down payment put up by the mortgage applicant, the lender needs more protection to avoid them losing out. This means that they need you to pay an insurance premium to protect them against them, not getting their investment back through foreclosure proceedings.

Putting down more money can also result in lower interest rates as well as avoiding expensive insurance payments. If you are buying in a hot market, you may find sellers are keener to accept offers that come with larger down payments as well. Is that justified? No, at times, it's not. There are plenty of borrowers who put less than twenty percent down who are just as qualified, if not more than someone who doesn't.

Unfortunately, lots of real estate agents feed into the myth that twenty percent down means you are more qualified to buy a home. There is a significant percentage of buyers who choose not to put twenty percent down because they would rather be able to use that money elsewhere to invest.

Don't Confuse Earnest Money With Your Down Payment

When buying a home, your earnest money deposit will be due when you write the offer. You shouldn't confuse your down payment with an earnest money deposit. The earnest money is a good faith deposit to show the seller that you are serious about buying their property. This figure can be anywhere from 1 to 5 percent of the offer you've made to the seller. And it is money which you could lose if you back out of the agreement for reasons not covered in contingencies.

The down payment is money, which is paid to the seller, with the lender making up the difference to meet the sales price. The down payment is typically due at closing, and earnest money is needed when you make an offer on the property.

Final Thoughts on Down Payment Requirements to Buy a Home

Saving for a house purchase is the goal of many. The American dream of owning a home is still alive and well. With the prices of housing and even rent skyrocketing across the country, it is vital to become a saver earlier in life. Those who are fiscally responsible earlier in life make it far easier to achieve the goal of homeownership.

Work on saving wherever you can and it will pay off down the road.

Put your best foot forward financially early, and you will more than likely become a proud homeowner far in advance of your friends.

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Bill Gassett is a thirty-two year veteran to the real estate industry. He enjoys providing helpful information to buyers, sellers and fellow real estate agents to make sound decisions. His work has been featured on RIS Media, National Association of Realtors, Inman News, Placester, RESAAS, Credit Sesame and others.

Comments (1)

Grant Schneider
Performance Development Strategies - Armonk, NY
Your Coach Helping You Create Successful Outcomes

Good evening Bill Gassett -  A number of cautions here.  People to talk to a mortgage professional before moving money.

Mar 26, 2020 03:54 PM
Bill Gassett

It is always smart to get some expert mortgage guidance on what programs would be best suited to the buyer's financial needs.

Mar 26, 2020 04:13 PM