Down payments to obtain a mortgage loan are arguably the biggest hurdle for first-time homebuyers. They’re an upfront payment that helps the lender determine how little or how much risk you might be of defaulting on the loan. The most desirable down payment, as far as a lender is concerned, is 20% of the price of the home, or $80,000 on a $400,000 home. With a 20% down payment, you can:
- Obtain the best interest rate possible
- Reduce the size of your monthly payments
- Avoid funding fees and ongoing fees such as private mortgage insurance required for paying less than 20% down
- Begin homeownership with instant equity, or a larger percentage of ownership
However, you don’t have to put 20% down, and in some circumstances, it may be preferable that you don’t. Saving for a down payment can take significant time that may be better spent building equity. Some loans backed by the U.S. government require as little as 3.5%, 3.0%, or zero down, so if you’re willing to pay private mortgage insurance, you’ll be able to save or start building cash for emergencies, repairs and maintenance, college, and other uses. You’ll also have more cash for closing costs, which are tax-deductible the first year you own your home.
If you’re a first-time homebuyer, you can get down-payment assistance in the form of state-sponsored grants, property tax incentives, or other means. Believe it or not, you’re considered a first-time homebuyer if you haven’t owned a home in the last three years, regardless of how many homes you may have owned in the past. That makes you eligible for numerous down-payment assistance and grants.
If you’re currently saving for a down payment, how much will you need? The minimum depends on the type of mortgage loan you get. All mortgage loans must adhere to guidelines set by the government or government-sponsored entities.
Conventional mortgage loans require a minimum of 3% down and a credit score of at least 620. These loans must follow the income limits, down-payment minimums, and qualification guidelines set by the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. Conventional mortgages such as HomeReady and Home Possible allow banks to package their loans into securities and sell them to the GSEs, which helps the banks replenish their cash so they can underwrite more mortgages.
Conforming mortgage loans are those guaranteed by the U.S. government against defaults by borrowers—again keeping mortgage money flowing to new borrowers. These loans include those guaranteed by the U.S. Department of Veterans Affairs for current and veteran military service members and the U.S. Department of Agriculture’s Rural Development program for rural and suburban development. Neither require a down payment. FHA loans, which are backed by the Federal Housing Administration, require 3.5% down with a credit score of at least 580. For those with credit scores of 500 to 579, a 10% down payment is required. In 2023, the typical down payment for first-time home buyers was 8%, compared to 19% for repeat home buyers.
So where do you get down-payment assistance? If you still need help, in spite of low down-payment requirements, you can ask your lender where to find down-payment assistance programs. The types of closing cost and down-payment assistance vary by program. Your state or local housing finance agencies may be able to offer grants or loans which don’t have to be repaid in addition to tax credits, or loans that can help you. You should also seek down-payment assistance from nonprofits, credit unions, banks, mortgage lenders or employers.
You may be required to take a first-time home buyer class to help you navigate the complicated homebuying process. Or you may have to qualify in other ways, such as being a member of the “workforce,” which means people who are paid by the state—police, teachers, firefighters, nurses, and emergency response personnel.
- Grants: gifts of money that don’t have to be repaid.
- Zero-interest, forgivable loans: loans forgiven over a set term, but they don’t have to be repaid as long as the borrower still owns and lives in the home.
- Zero-interest, deferred-payment loans: payments on the down payment and closing costs aren’t due until the home is sold, refinanced or the mortgage is paid until the end of its term.
- Low-interest loans: these loans spread the down payment and closing costs over multiple years.
If your lender isn’t familiar with all homebuying assistance programs available to you, contact your state housing finance agency here.
You may wonder why so much help is available to homebuyers and if it’s all too good to be true. There are many reasons. Home ownership gives households a stake in the community, which promotes economic development, job creation and greater community involvement. In 2022, the median and average wealth gap between homeowners and renters reached all-time highs or $390,000 and $1,370,000 respectively. Owning a home is a significant tool for creating wealth and demonstrates financial responsibility and stability. Homeowners are invested in protecting their home values and tend to take better care of properties and their neighborhoods. More homeowners than renters are voters so government pays more attention to them. Home equity can be borrowed against for home improvement, education, and other uses. Then there’s pride of ownership and enhanced privacy and security, which follow sacrifice, determination, and the desire to make life better for their families. The list goes on.
Homeownership comes with few downsides, but among them are higher upfront costs. Closing costs on a mortgage can run anywhere between 2% and 5% of the purchase price, depending on where you live and what kind of mortgage you get. They include banks fees, property taxes, mortgage insurance, home inspections, escrowed insurance premiums, title search and insurance, and pre-paid points or interest on the mortgage, all of which take about five years to cover the costs, not including home appreciation. Mobility can be an issue if you need to sell quickly in slow markets, but you can always rent out your home if you need to move. Instead of asking the super to come by and fix something, you’ll have to do it. If you don’t have maintenance skills, you’ll have to hire professionals or get another loan to upgrade the home, its appliances and operating systems. While it happens rarely, your property values can fall, leaving you upside-down in your mortgage.
Renting has its downsides, too. A landlord can raise the rent and refuse to give you deposit back in certain circumstances, plus you’ll have zero tax deductions or the ability to personalize your home. But the main difference is that you’re building equity for the landlord, and not for yourself.
For all these reasons, 65.6% of Americans own a home.
