If you’re thinking of buying a home, don’t let down payment concerns discourage you. There are several ways that lenders can help you determine a down payment scenario that works for you.
Almost all mortgage options require a down payment – the money you pay up front to make up the difference between the price of the home and the amount of the mortgage. The amount of your down payment can influence what financing options and interest rates are available to you. The more you put down, the less you’ll have to borrow.
So how can you know how much you need?
According to the 2019 Profile of Home Buyers and Sellers by the National Association of Realtors®, the median down payment for homebuyers is 12% of the purchase price — which would be $24,000 for a $200,000 home, for example.
But the truth is, different types of loans may each have their own set of requirements for a down payment, and the down payment that’s right for you is the one that fits your budget and your loan selection.
Mortgage options for low down payments
The list below is an example of common types of loans that offer low-down-payment options.
- Conventional loans: First-time homebuyers might qualify for a down payment of just 3% of the purchase price.
- VA loans: If you qualify for this loan, which is backed by the Department of Veterans Affairs, you won’t be required to make a down payment at all.
- USDA loans: If you qualify for a loan backed by the U.S. Department of Agriculture, your down payment could be 0%.
- FHA loans: First-time homebuyers might qualify for a down payment as low as 3.5% of the purchase price.
What to know about low down payments
Remember, if you do choose to make a lower down payment, your monthly payment is likely to be larger. Also, if you put down less than 20% of the purchase price with a conventional loan, you may need to purchase private mortgage insurance. This insurance provides protection for the lender in the event you are unable to make mortgage payments. Mortgage insurance increases the cost of the loan and will increase your monthly payments.
Down payment assistance programs
Two main types of assistance programs are available to help eligible homebuyers become homeowners: down payment assistance programs and mortgage revenue bonds. Let’s take a look at these two.
Down payment assistance programs, or DAPs, provide supplementary loans, liens, or gift funds at below-market interest rates to eligible borrowers who need help coming up with a down payment and, in some cases, closing costs.
Mortgage revenue bond programs are first-mortgage financing plans offered by state, county, city, and governmental authorities. They offer low- or below-market interest rate options, expanding homeownership opportunities for low-to-moderate-income families and first-time homebuyers. These authorities often offer down payment and closing costs assistance exclusively for use with mortgage revenue bond programs.
Guidelines vary but typically depend on your current income and credit score, the sale price of the property, how much you have available for a down payment, and how much of your monthly income is spent on debt.
Other ways to fund your down payment
Gift funds are another way to obtain a down payment. Lenders may allow funds that come from an acceptable source and are not expected to be repaid. (An acceptable source is determined by the loan program or product.) In some cases, you may be able to use a gift from a relative, friend, employer, or not-for-profit organization. FHA and VA allow gift funds to be used toward the required down payment and closing costs. You may need a letter to inform the lender that you will be using such a gift.
If you make a down payment of at least 20%, for conventional financing, gift funds are allowed and can be used for the full down payment. If you put down less than 20%, part of the money can be from a gift, but some of your down payment must come from your own funds. This minimum contribution varies by loan type.