What to know about down payments

Conventional wisdom tells buyers that they need to be able to afford a down payment of at least 20% before purchasing a home. However, this is not always the case – particularly for first time home buyers.

According to the National Association of Realtors, in the last five years more than 70% of first-time buyers make down payments of less than 20%. In the same time, 54% of all buyers made down payments of less than 20% as well. Whether it is your first home or your fifth, the following guide can help potential buyers understand down payments – and how to choose the right amount.

What is a down payment?

A down payment is the money that is paid towards the purchase of a home upfront. The down payment is a percentage of the sales price. For example, a 20% down payment on a home that costs $300,000 would be $60,000. The remainder of the purchase price – $240,000 in this example – if borrowed from a lender as a mortgage.

The down payment is done in two parts: the earnest money and the remainder of the down payment. The earnest money is paid when the offer is made on a home; if accepted, this contract deposit goes into an escrow account and is held until closing. The earnest money is then applied to the mortgage amount with the rest of the down payment.

How much do you have to put down?

A 20% down payment is recommended for most conventional loans; this prevents borrowers from needing to pay PMI, or private mortgage insurance. Different loan types have different down payment requirements. FHA loans with a 30-year fixed rate have a minimum 3.5% down payment. VA loans and USDA loans require no money down as long as certain conditions are met.

How much should I put down?

The average first time homebuyer puts just 6% down [https://www.nar.realtor/research-and-statistics/research-reports/highlights-from-the-profile-of-home-buyers-and-sellers]. The decision of how much to put down on a home varies from buyer to buyer. If a home will need immediate repairs or upgrades, for example, a buyer may choose to make a smaller down payment; this frees up the cash for them to immediately add equity back into their new home.

A bigger down payment will lower the amount of a monthly mortgage payment; someone with a lot saved in the bank but a low annual income would benefit from a large down payment as it reduces the monthly payment. However, someone with a larger annual income and less savings might benefit from a smaller down payment and higher monthly payments.

Buyers should also consider how much money in cash they will have left after a down payment. Whenever possible, buyers should try to have a six months emergency fund remaining after their down payment.

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