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What you need to know before making a down payment on your home

By Tara Mastroeni
Published  June 24, 2021 4:40pm CDT
Personal Finance
Sponsored by Credible, which is majority owned by our parent, Fox Corporation. Credible is solely responsible for its services.
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Thinking of buying a home soon? Here’s what you need to know about making a down payment. (iStock)

Most home buyers know that there are quite a few costs that impact a person's ability to buy a home. For example, when you're ready to buy, you'll need to be prepared to pay your home down payment and closing costs upfront. However, in addition, the interest rate that you're given on your home loan can also affect the size of your monthly mortgage payment. 

In an effort to help you make sense of these rates and fees, we've created a guide on mortgage down payments below. Keep reading to learn more about what you need to know before making a down payment on a property during the home buying process.

HOW MUCH MONEY DO YOU REALLY NEED TO BUY A HOUSE?

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Minimum down payment requirements

First, it's important to note that there are many different types of loan programs available in the mortgage market. Each mortgage program comes with its own loan eligibility standards and down payment requirements. With that in mind, we've gone into more detail about what kind of down payments you can expect from the various loan types below: 

  • FHA loans: If you get a mortgage insured by the Federal Housing Administration, you can typically expect to have to make a minimum down payment of at least 3.5% of the home's purchase price. However, in the event that your credit score is lower than 580, you will likely have to make a larger down payment of at least 10%.
  • VA loans: One of the biggest loan benefits that the VA offers is that its loans do not come with a down payment requirement, which means that you can finance up to 100% of the home's purchase price.
  • USDA loans: Notably, USDA loans do not have a down payment requirement either. However, buyers that are looking at this type of mortgage will be subject to certain property and income requirements.
  • Conventional loans: Typically, conventional loans require a down payment of at least 3%-5%. That said, mortgages with down payments that are less than 20% are going to be subject to a private mortgage insurance (PMI) requirement.

HOW MUCH MONEY DO YOU NEED FOR A DOWN PAYMENT ON A HOUSE?

Use a mortgage payment calculator to get a sense of what your payment amounts could be at a variety of loan amounts.

Should a down payment be small or large?

When saving money, many people wonder how much their down payment will cost. Truthfully, the answer will depend on the home’s purchase price. However, in order to give you a better sense of what to expect, consider the following example: If you were to buy a $300,000 property, a 5% down payment would be $15,000. Meanwhile, a 20% down payment on the same house would be $60,000. 

While you’ll only have to meet the minimum down payment requirement, larger down payments are generally considered preferable over a lower down payment. For one thing, a larger down payment will lower your loan amount, which will help you save money on your monthly payments and may even secure you a lower interest rate. For another, you'll have more equity built up in your home, which will come in handy when you need to leverage your largest asset via a home equity loan or home equity line of credit (HELOC).

CAN YOU BUY A HOUSE WITH LESS THAN 20% DOWN PAYMENT?

Visit Credible to get personalized loan rates in as little as three minutes without affecting your credit score.

Common down payment sources

Lastly, there are many different ways to come up with the funds for a down payment on your perfect home. To that end, we’ve listed some of them below for your consideration: 

  • Saving money: This is the most traditional route to funding a down payment, though it may take some time before you are ready to buy.
  • Down payment assistance programs: Down payment assistance programs often offer grants or low-interest loans that buyers can put toward their down payment and closing costs. That said, these programs are usually only available for first-time buyers and lower-income buyers.
  • Retirement accounts: Usually, you can withdraw funds from a retirement account penalty-free if you are using them toward a home purchase.

HOW TO PAY OFF YOUR MORTGAGE EARLY: 5 OF THE BEST OPTIONS TO EXPLORE

The bottom line 

In real estate, a down payment is one of the largest costs of buying a home. Yet, the more you know about it, the more prepared you can be when the time comes. In light of that, use the information in this post to help you get started on your journey to becoming a homeowner.

If you have any questions about your down payment or the rest of the mortgage process, visit Credible to be connected with experienced loan officers who can provide you with answers.

Have a finance-related question, but don't know who to ask? Email The Credible Money Expert at moneyexpert@credible.com and your question might be answered by Credible in our Money Expert column.