Skip to content

Down Payment | How much for a down payment on a house?

Jim Quist Jan 4, 2023 1:13:48 PM
Down Payment on a house. How much?

If you're thinking about buying a home, you should know you have choices regarding a down payment.

The popular belief is that homebuyers need 20% of the property's purchase price. But instead, the minimum down payment is 3%, and you can get a home loan for up to $726,200 and put as little as 3% down.

What's more, the average down payment is 6% for first-time buyers, according to National Association of REALTORS® 2020 research.

This article offers information to help you decide if you can reach your goal of homeownership with a smaller, more manageable down payment.

What is a down payment? 

A down payment on a house is a percentage of the purchase price that you, the home buyer, pay upfront in cash at closing, which is the final step in the home-buying process. Then, you finance the remaining purchase price balance through a mortgage loan.

 

For example, if you're buying a house for $500,000 and make a down payment of 3%, you would pay $15,000 upfront in cash and finance the remaining $485,000 through a mortgage loan.

 

You must have the funds available for the down payment in cash before closing the home. Also, the down payment is just one part of the overall cost of purchasing a home. You'll also need to consider closing costs.

Book time to talk

 

What's the difference between a down payment and closing costs?

The down payment is separate from closing costs and is typically a percentage of the home's purchase price. On the other hand, closing costs are a different set of fees you pay on top of the down payment.

Closing costs are the expenses associated with getting your mortgage approved. These costs vary but usually include an appraisal, credit report, and title fees. Pay these costs at closing along with the down payment.

Use our free Closing Cost Calculator to see actual interest rates, monthly payments, and closing costs upfront.

View current rates

 

Why do I need to make a down payment when buying a home?

There're several good reasons for making a down payment when purchasing a home—the following two show how a down payment saves you money. 

  • By paying a portion of the home's purchase price upfront in cash, you borrow a smaller amount, lowering the overall cost of the house.
  • Because a down payment lower's the lender's risk and shows you're committed to the purchase, you get better loan terms, such as a lower interest rate and payment.

 

How much for a down payment on a house?

Homebuyers can put down as little as 3% of the property's purchase price. However, the actual amount of money you'll need for your down payment depends on a few factors, including: 

  1. Property use - Will you live there or rent it out? 
  2. Property type - Is it a house, condo, townhome, or a 2-to-4-unit property?
  3. Creditworthiness - What's your credit score?
  4. Loan type - Will you use a conventional or an FHA loan to buy the property? 

The following table shows the minimum down payment as a percentage of the purchase price for conventional and FHA mortgages, assuming the property will be your principal residence. 

Property type

Credit score minimum

Loan type

Down payment minimum

House, condo, or townhome
620
Conventional
3%
580

FHA

3.5%

2-units, Duplex

620

Conventional

15%

580

FHA

3.5%

3-to-4 units, Multi-family

620

Conventional

20%

580

FHA

3.5%

 

Lenders view investment properties as riskier than owner-occupied properties. As a result, lenders require a higher down payment to offset this risk.

The following table shows the minimum down payment as a percentage of the purchase price for a conventional mortgage on an investment property. Unfortunately, FHA doesn't allow for investment properties.

Property type
Credit score minimum
Loan type
Down payment minimum
House, condo, or townhome
620
Conventional
15%
2-to-4 units, Multi-family
620
Conventional
25%

 

Get pre-approved

 

How much for a conventional loan down payment?

With a conventional mortgage, you can put down as little as 3% if you have a strong credit score and meet specific requirements. 

 

If you make a 3% down payment on a house with a purchase price of $500,000, the down payment would be $15,000.

  • Down payment = 3% x $500,000 = $15,000

The remaining purchase price balance, financed through a mortgage loan, is $485,000. 

  • Purchase price - Down payment = Remaining balance
  • $500,000 - $15,000 = $485,000

 

The size of the down payment can affect the terms of the mortgage and the overall cost of the home. Generally, a larger down payment can result in a lower mortgage rate and monthly payment, as well as potentially helping to reduce the overall cost of the home. 

Furthermore, if your down payment is less than 20%, you'll pay private mortgage insurance or PMI each month until you build up 20% equity in your home. 

PMI can be relatively inexpensive compared to the benefits of buying a home and building equity sooner rather than later.

See if you qualify for a 3% down payment - talk to a mortgage expert at NewCastle Home Loans today. Ask questions, get straight answers, and find out how to start on your home loan.

Book time to talk

 

For an FHA loan, what is the minimum down payment?

The minimum down payment requirement for an FHA mortgage is 3.5% of the home's purchase price. FHA loans make buying homes easier for first-time homebuyers and those with lower credit scores. 

 

As a first-time home buyer using an FHA loan, you can buy a 2-to-4-unit property with a down payment of only 3.5% of the purchase price. It's an affordable investment that can generate income, build wealth, and earn you tax breaks.

  • The down payment on a $500,000, 4-unit property using an FHA loan with a 3.5% down payment would be $17,500.

For more information: Multi-family home | 2-to-4 unit property | First-time homebuyer

 

FHA mortgages require you to pay mortgage insurance, which increases the loan's cost. For more information: FHA mortgage insurance | How much is it? Can you cancel it?

Use our FHA mortgage calculator to view the current rate and monthly payment, including the cost of the FHA mortgage insurance. Then, feel confident in buying a home because you know what to expect.

View current rates

 

For a VA loan, what's the minimum down payment?

One of the benefits of a VA loan - you don't have to make a down payment to buy a 1-to-4-unit when you finance the purchase with a VA mortgage. In addition, VA loans have lower closing costs than other types of mortgages.

The U.S. Department of Veterans Affairs (VA) created these loans to make purchasing homes easier for veterans and their families. Because NewCastle Home Loans is an approved VA lender, we offer VA mortgages to eligible homebuyers.

Visit our VA loan page for more information, and use the VA Loan Calculator to view current rates, monthly payments, and closing costs. 

 

For a USDA loan, what is the minimum down payment?

Suppose you're buying a house in a rural or suburban area, and your down payment resources are limited. In that case, you should consider a USDA mortgage.  

You may not need a down payment with a mortgage backed by the U.S. Department of Agriculture (USDA). Additionally, USDA loans have lower closing costs than other types of mortgages.

The USDA designed these loans to help qualified lower and moderate-income home buyers in areas often overlooked by banks and mortgage lenders. 

NewCastle Home Loans offers USDA loans in Florida, Illinois, and Indiana. Book time on our website to talk with a USDA loan expert. Ask questions, get straight answers, and find out how to start on your home loan.

Book time to talk

 

When do I need the money for the down payment?

You need to come up with the money for the down payment at closing. However, the timing depends on the specific terms of the real estate sales contract - the purchase agreement between you and the seller. 

Check out our Sales Contract Explainer to learn more about your contract.

In most real estate deals, the buyer pays the seller earnest money after negotiating the terms of the sale and signing the sales contract. The contract is a legally binding document that outlines the terms and conditions of the deal, including the price of the home, any contingencies, and the closing date. 

Earnest money is the portion of the down payment you pay before closing. Typically, the earnest money is a small percentage of the home's purchase price, ranging from 1% to 3%. It's held in escrow and applied toward your down payment at closing. 

Then, you pay the balance of your down payment at closing when finalizing the deal and taking ownership of the property.

 

Let's say you're buying a house for $500,000, making a 3% down payment and a 1% earnest money deposit. 

Next, you pay $5,000 of the down payment in earnest money in advance. The title company or escrow agent holds the deposit until closing.

Then, at closing, you pay the rest of the down payment of $10,000.  

  • $500,000 = Purchase price
  • $15,000 = Down payment, 3% of the purchase price
  • -$5,000 = Earnest money, 1% paid in advance
  • $10,000 = The rest of the down payment is due at closing. 

View current rates

 

Where can I get the money for a down payment?

While most buyers use personal savings to finance down payments, there are many other options, including gifts from relatives. In addition, some state, county, and city governments offer down payment assistance programs to people in their communities who are well-qualified and ready for homeownership.

Twenty-six percent of first-time and seven percent of repeat buyers said that saving for a down payment was the most challenging task in the home-buying process. 

Here are a few familiar sources for down payment money.  

  • Savings and retirement - 70% of homebuyers use personal savings and retirement money.
  • Gifts - 32% of first-time buyers get gifts from relatives or friends.
  • Down payment assistance - 10% use grants and loans from nonprofit or government agencies.
  • Loans - 4% borrow from other properties they own. 

31% of homebuyers roll the proceeds from selling their previous house into their new home. Get pre-approved for a mortgage to buy a home so you can start building equity too.

Get pre-approved

 

What documents does the lender need for the down payment?  

Lenders will ask you to prove where you got the money for the down payment on a home to ensure that you have the financial resources to complete the purchase. Your down payment on a house must come from an acceptable source.

To prove it, the lender may ask you to provide the following:

  • Bank statements
  • Gift letter
  • Proof of down payment assistance grants
  • Retirement account statements
  • Personal loan documents

Verifying the source of funds helps the lender assess your overall financial stability and ability to repay the loan. In addition, it helps prevent fraud and money laundering. By requiring proof, lenders can ensure that it is from legitimate sources and not being used to facilitate illegal activity.

Overall, verifying the source of funds for the down payment is an essential part of the mortgage process and helps to protect both the homebuyer and the lender.

 

Is it worth putting 20% down on the house?

There are several factors to consider when deciding how much to put down on the house. 

Putting 20% down on the house can be a good choice because it can help you avoid the need for private mortgage insurance (PMI). PMI is an insurance policy that protects the lender if you default on your mortgage.

However, PMI can be relatively inexpensive compared to the benefits of buying a home and building equity sooner rather than later.

Another factor to consider is your financial situation. For example, if you have debt or financial commitments, it might not make sense to put a large amount of money down on the house.

On the other hand, if you have a stable financial situation and can afford a larger down payment, it might make sense to put more money down to get a lower mortgage rate and build equity in your home more quickly.

Ultimately, deciding how much to put down on the house will depend on your financial situation and goals. Therefore, it's a good idea to consider your options carefully and speak with a mortgage expert at NewCastle Home Loans before making a decision.

Book time to talk

 

Jim Quist NewCastle Home Loans
JIM QUIST
President and Founder of NewCastle Home Loans. Jim has been in the mortgage business for 20+ years.

Leave a Comment