*As of July 6, 2020, Quicken Loans is no longer accepting USDA loan applications.
If you’re considering buying a home, you might be wondering how much money you’ll need for a down payment. Here are the must-knows about down payments to help you decide what makes sense for your situation.
Do You Need To Put 20% Down On A House?
A down payment is the money you’ll put down during your mortgage closing, which is the last step you’ll take when buying a home. During the closing, you’ll also sign your mortgage documents and officially gain ownership of the property.
Lenders often express your down payment as a percentage. For example, a 20% down payment on a $200,000 mortgage loan means you’ll pay $40,000 when you close on your loan.
The idea of a 20% down payment can make homeownership feel unrealistic, but very few lenders still require 20% at closing. In fact, you can get a conventional mortgage, the most common loan type, with as little as 3% down.
To look at how a down payment affects your monthly mortgage payment, take a look at a mortgage calculator. You'll enter some basic info to get an estimated monthly payment and can play around with different down payment amounts to see what works best for you.
Benefits Of Putting 20% Down
If you’re able to put 20% down on your home, you’ll reap a few key benefits.
You’ll need to put 20% down if you want to avoid buying private mortgage insurance (PMI). PMI is insurance that protects your lender if you default on your mortgage loan.
Even if you don’t put 20% down, you can request that your lender remove PMI once you’ve reached 20% equity in your home. In most cases, lenders automatically cancel PMI once you’ve built at least 22% equity in your home.
Equity refers to the amount of a home’s value that you actually own. Here are two ways you can gain equity:
- If your home increases in value
- If you pay off your mortgage principal through your monthly mortgage payments
Access To Better Interest Rates
The interest rate is the percentage of the principal, or outstanding balance on your mortgage, that your lender charges you for monthly for borrowing money.
The higher your down payment, the less of a risk you are to lenders. If you’re able to put down at least 20% on your mortgage at closing, you’ll have access to lower interest rates. An interest rate that’s just one or two points lower can save you thousands of dollars over the course of your loan.
Less Interest Over Time
A higher down payment means your loan is smaller, so you’ll pay less in interest over time.
Lower Monthly Payments
The larger your down payment, the less money you’ll borrow for your mortgage loan. A higher down payment means you’ll lower your monthly mortgage payments.
Get An Edge Over Other Buyers
Home sellers often prefer to work with buyers who have at least a 20% down payment. Higher down payments indicate that your finances are more likely to be in order, so you might have fewer problems finding a mortgage lender. A 20% down payment can give you an edge over other buyers, especially if the home you want is in a hot market.
Drawbacks Of Putting 20% Down
Putting 20% down isn’t right for every buyer; there are a few drawbacks of saving a 20% down payment.
More Financial Risk
Once you put money down on your mortgage, it’s not easy to get it back. If you think there’s a chance you might need the money for something important later, it may be wise to put down less and build your emergency fund.
Less Money For Repairs And Other Items
Homes in need of only a few minor repairs can be a bargain for new buyers. However, the larger your down payment, the less money you’ll have left over to spend on repairs and maintenance.
Saving Takes Longer
For most people, saving for a down payment can take months, years or even decades. Waiting until you have a 20% down payment can lead to a huge opportunity cost when you factor in what you’d spend each month on rent.
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Can You Buy A House Without A Down Payment?
Yes! It’s possible to buy a home with no money down. However, you won’t be able to get a zero-down conventional loan. You’ll need to get a government-backed loan.
Government-backed loans are mortgage loans that the government insures. They present less of a risk to lenders because the government will cover the financial loss if you default on the loan. This means that lenders will be more willing to issue lower-than-average interest rates and less-strict down payment requirements.
Currently, you can buy a home with no money down if you qualify for a VA loan or a USDA loan. VA loans are mortgage loans for current and former members of the armed forces and certain surviving spouses. USDA loans are mortgage loans for homes in qualifying rural and suburban areas. Both VA loans and USDA loans have a zero-down payment guarantee, but you must meet the minimum qualifications set by the USDA and the Department of Veteran Affairs (VA).
Minimum Down Payments By Loan Type
The amount you’ll need for a down payment depends on the type of loan you choose. Some of the minimum down payment requirements also depend on whether you’re buying a primary residence, secondary residence or investment property.
Down Payment On Your Primary Residence
Down payment requirements for your primary residence, or main home, can vary.
Conventional loan requirements for primary residences are totally up to the individual lender. Some lenders might require you to have 5% down, while other lenders may only require 3%. If you have a credit score that’s above 620 points, your lender may give you access to lower down payment loan options.
With an FHA loan, you’ll need a down payment of at least 3.5%. To be able to put down the minimum 3.5% FHA down payment, you’ll need a credit score of 580 or higher. If your credit score is between 500 and 579, you’ll be required to put down at least 10%.
You don’t need a down payment to qualify for a VA loan. There are specific length-of-service requirements that determine your eligibility, and your discharge reason also plays a role. You can view complete service requirements for the VA loan program on the Department of Veterans Affairs (VA) website.
If you’re the spouse of a military member or veteran who died in service or from a service-related disability, you may also be eligible for a VA loan. Full eligibility requirements for spouses are also available on the VA website.
Like a VA loan, you don’t need to have a down payment to get a USDA loan. But to qualify, your home needs to be in an approved rural or suburban area and your household members also need to meet certain income requirements.
Down Payment On Your Secondary Residence
A second home is a residence that you intend to occupy in addition to your primary residence. A second home can be a vacation home or a property that you visit on a regular basis.
Conventional loan requirements are higher for people who want to buy a second home. To qualify for a loan on a second home, you’ll need a down payment of at least 10%. Keep in mind that restrictions on what is and isn’t considered a second home may apply. For example, you can only rent the home for up to 180 days a year.
You cannot use an FHA loan to buy a second property.
You cannot use a VA loan to buy a second property.
You cannot use a USDA loan to buy a second property.
Down Payment On Your Investment Property
Investment property is real estate that you buy in order to earn a return on your investment, either through rental income, the future resale of the property or both.
If you buy a home with the sole intention of renting it out, you’ll need a conventional loan. Conventional loan requirements for investment properties are the most strict of any loan type. In most cases, you’ll need a down payment of between 20% to 25% to qualify. If you have a credit score that’s higher than 720, you may qualify for an investment property loan with 15% down.
You cannot use an FHA loan to buy an investment property.
You cannot use a VA loan to buy an investment property.
You cannot use a USDA loan to buy an investment property.
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You no longer need a 20% down payment to buy a home. It’s now possible to buy a home with as little as 3% down, and you may even be able to buy a home with no money down if you qualify for a VA or a USDA loan.
If you have less than a 20% down payment, you may have to buy private mortgage insurance, pay a higher interest rate or face more housing market competition.
Putting down less than 20% can leave you with more money to save for potential emergencies or repairs, which may be worth it for some buyers. But, you may need a higher down payment if you decide to buy a second vacation home or an investment property. Rocket Mortgage® by Quicken Loans® can help you figure out which loan option best fits your financial situation.
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