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How much do I need for a mortgage down payment?
A small down payment means a pricier mortgage in the long run.
Many potential homebuyers think they need a 20% down payment to get a home loan. And though that’s often the most beneficial scenario for a number of reasons, many homebuyers may qualify for a significantly smaller down payment — or none at all.
How much do I need for a down payment?
The minimum amount you’ll need for a down payment depends on what type of loan you’re getting. Most loans require a credit score higher than 620, though some government-backed loans accept lower.
- VA loan. No down payment
- USDA loan. No down payment
- Fannie Mae HomeReady loan. 3%
- Freddie Mac Home Possible loan. 3%.
- FHA loan. 3.5%
- Conventional mortgage. Generally 3% to 5%
Are there any downsides to buying property with a low down payment?
Yes, there can be. Making a small down payment can lead to higher interest rates, which can make your home cost a lot more in the long run.
Plus, if you put down less than 20% on a home with a conventional loan, you’ll likely need to have private mortgage insurance (PMI). PMI generally costs anywhere from 0.5% to 1% of the loan amount annually on a conventional loan.
Mortgage insurance is required for FHA and USDA loans — no matter your down payment amount. FHA loans have a 1.75% upfront mortgage insurance and an annual MIP of 0.8% or 0.85% of the loan amount. For USDA loans, you’ll need 1% upfront and 0.35% annually.
How do I determine my down payment size and borrowing amount?
- Based on your income and expenses, calculate a mortgage payment you can comfortably afford. For a rough estimate as to how much you might be eligible to borrow, put your income and expenses into the borrowing calculator below.
- Now, take your borrowing power and multiply it by the minimum down payment amount for your loan type. For example, let’s say your borrowing power suggests a loan of $300,000.20% down payment
5% down payment
- $300,000 x 0.20 = $60,000
- $300,000 x 0.05 = $15,000
In this example, you’d want to save between $15,000 and $60,000 for a down payment on a $300,000 home. While $15,000 is the minimum, the more you put down, the less you’ll pay in interest over the life of the loan.
- Consider saving for other added expenses.
- Taxes. When you buy a home, you may be required to pay a real estate transfer tax. These taxes can range from none in some places, to thousands of dollars in others. Before buying a home, research the transfer tax and factor it into your loan amount.
- Closing costs. When you apply for a loan, closing costs can run about 2% to 5% of the loan amount. That’s between $6,000 to $15,000 on a $300,000 mortgage.
- Cash reserves. It’s not recommended to clear out your bank accounts for a down payment. Most lenders require at least two months of mortgage payments available in the bank for a rainy day. So if your monthly payment was $1,000, your lender might want to see $2,000, excluding closing costs, in the bank before closing.
Is it worth paying PMI to buy a property faster?
That depends on both your financial situation and how much you want to get into a house right now.
If you’re paying through the nose for a rental and your monthly mortgage would be significantly less, it may be worth it to buy a home sooner with what you have saved, even with the PMI and higher interest rate.
But if you can save up a bit longer, it can save you a lot of money in the long run. Alternatively, you can always refinance your mortgage to drop PMI once an appraiser can verify that you’ve built 20% equity.
If you qualify for a VA or USDA loan, you can buy a house without a down payment. But for FHA and conventional loans, you’ll generally need to put between 3% and 5% down — the more you can comfortably pay upfront, the better. To find out which scenario will work best for you, compare mortgage options.
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