Don't Empty Your Bank Account To Buy A Home (12 Minimum Down Payments For Different Loans)

Certified Mortgage Advisor
NMLS 1701021
Published 
November 30, 2021

Do you really need 20% down?

I still keep hearing people say that you need 20% down to buy a home and you absolutely do not. The minimum down payment is actually a lot less than 20%. So now, I'm going to cover 12 minimum down payments on different types of loans, because saving for a down payment is tough, especially as home prices continue to increase.

Home appreciation gets higher and higher

I keep hearing stories about people saving for years only for the price of a home. To continue to go up and up sometimes over a hundred thousand dollars in value. And last year appreciation for home growth was around 17%. So that means if you wanted to buy last year, this time, last year, the medium home price was around $337,000. Then a period of a year, the median home price skyrocketed up to $405,000. That means for a minimum down payment on a conventional loan, you need an addition. $2,000 more in down payment, or in other words, you need to save $168 a month on top of your current savings for a down payment and closing costs, just to keep up with home appreciation.

Conventional loans

So I'm gonna walk you through 12 minimum down payments so you can better understand different loans and then decide what you want to do. So the first tier is conventional loans. Conventional loans are usually best for people who have lower debt compared to the income that they have and usually have a higher-end credit score. So 680 and higher is usually best. However, the minimum can go down to 620.

3% for first-time home buyers

The first one here is 3%. So this is usually reserved for first-time buyers. And a first-time buyer, someone who has not been on the title two home in the past three years now, first-time buyers and conventional loans have two programs underneath them called HomeReady and Home Possible. You can use these if you're not a first-time home buyer if you're under an income limit in your area. So you can talk to a loan officer a little bit more if you qualify for those.

But 3% down is the minimum that you need as a first-time home. On a conventional loan, far less than the 20% that most people talk about.

5% for home owners

The second is 5% down. So if you've already owned a home, then you're likely going to have 5% as a minimum down payment on a conventional loan. You get disqualified from the first time home buyer label and can't use the 3%.

Don't forget to compare

Now, if you are a first-time buyer, you might consider looking at both a 3% down payment and a 5% down payment and get quotes from loan officers on both. Because often you can get a lower interest rate on 5% down than you can on 3%. That's why it's good to compare.

What is 20% down?

Then finally, 20% down. Why does everyone talk about 20% down? 20% down, it used to be what was very common as a minimum years ago. It's not really a thing. What 20% down does now is it eliminates the need for mortgage insurance, PMI.

PMI

Private Mortgage Insurance. So basically, if you have a down payment, less than 20%, the lender is going to charge you a monthly fee called Private Mortgage Insurance, which basically protects the lender. In the case that you default on a loan. It's really not that expensive. It's usually probably going to be between a 60 to $120 per month, depending on your loan size, compared to the rest of the payment.

It is not terrible, especially for the ability to not have to put 20% down. Now I do have the full loan requirements for conventional loans in this link: https://youtu.be/CFMfNaO_JHY. If you are interested in learning more about that. Then we move on to FHA.

FHA

FHA is great for people who have a lot of debt compared to their income. So what would be called a debt-to-income ratio, a high debt-income-ratio. FHA is great for that. Also great for if you have some credit challenges. FHA actually changes the down payment depending on what your credit score is.

2 Segments for FHA credit score

So there are two different segments here. If you have a 580 credit score and higher, the minimum down payment is 3.5% just to have a percent higher than conventional. If you have anywhere between a 500 to a 579 credit score, then the minimum down payment is 10%.

Mortgage insurance for FHA

FHA does require mortgage insurance for both of these types. If you have 10% down, mortgage insurance does fall off after 11 years on an FHA loan. For full loan requirements, check out this link: https://youtu.be/S-v9ZxJevfo

VA

VA or Veterans Affairs has fantastic options for veterans and works well with all different types of credit scores. So you do have to have a certificate of eligibility to be able to qualify for a VA loan, but the minimum down payment on VA is 0%. There's no down payment required, no monthly mortgage insurance required.

Funding Fee

However, there is what is called a funding fee. Think of it like mortgage insurance paid upfront and it's usually wrapped in included inside of the loan amount. For full loan requirements, check out this link: https://youtu.be/DD_2sJ6fP58

USDA

Another one, USDA 0% down. USDA is for what is called a rural area and more areas than you might think.

Actually, qualify for this for a lot of people. If they extend their commute by around 15 to 20 minutes, usually they can be inside of a USDA area that's considered rural and you can do 0% down. USDA tends to like 640 credit scores and higher. However, there are lenders who will go to a 500 credit score on USDA.

And again, for full loan requirements, check out this link: https://youtu.be/BJUxLw--b38

So all these loans that we just talked about, conventional FHA VA, and USDA all have loan limits except for VA. And the loan limit is just basically a maximum loan that the lender will give you. So if you go above that limit, then you need to get into what would be called a Jumbo loan.

Jumbo Loan

Jumbo loans are a little bit different because there are not as standard guidelines or standard roles as there are for these other types of loans. And so the down payment minimum can really vary a lot between different lenders.

So you want to talk with different ones to see, but there are a lot of lenders who do 5% down as a minimum, and there are a lot of lenders who do 10% down as a minimum. These tend to be the most common for jumbo loans. However, again, there are no strict guidelines. That all lenders follow on jumbo loans.

It's all going to be dependent on the specific lender that you're working with. So if you want to find minimums for jumbo, if you're looking at a loan size, that is a lot higher than what you can get with conventional, FHA, or USDA, then you want to shop with lenders to find that minimum down payment.

Portfolio Loan

The next is portfolio loans. A lot of people aren't familiar with portfolio loans in the same way that jumbo loans don't have a certain standard portfolio loan are the same, and that they don't have one strict standard. It varies from lender to lender and portfolio just means that it's a special type of program that usually is for a specific group of people.

So for instance, a lot of portfolio loans are what are called bank statement loans, or they actually use bank statement deposits, and an average of those to qualify you for a certain income, rather than things like pay stubs or W2's or tax returns or something like that. That's usually for self-employed people who write off a lot on their taxes.

DSCR Loan Debt

Then their option is what's called a DSCR loan debt, service coverage ratio loan, which basically is for investment properties where instead of underwriting income or asking for somebody's a W2's tax returns, pay stubs, things like that. They'll actually look at how much income does the property creates compared to how much is the monthly payment.

So those are portfolio loans, usually for a special case scenario. And again, these are very lender to lender, but usually, you're going to run in. 10% down as a minimum on certain programs for really well-qualified people, higher credit scores, low debt-to-income ratios, or 20% when you're getting it into more of the investment type loans.

DPA

Then finally is down payment assistance. And we're also going to increase, include any sort of grants in there, which we would classify as down payment assistance. Unfortunately, the answer is there is not one set.

How to look for down payment assistance program

There are all kinds of down payment assistance programs throughout the US the best way to figure these out is to search for your local housing authority, either in your county or state, and they should direct you to different programs.

Down Payment Assistance program are all different

Different down payment assistance programs will either offer a certain dollar amount of assistance towards a down payment, closing costs, or a percentage of the purchase price towards the down payment or closing costs. Just know that when you do run into down payment assistance programs, you might run into somewhere you don't have to pay anything.

More than often you will still likely need to bring some money to the closing table, maybe just not the full down payment. So for instance, I've seen it be very common where the down payment assistance program might offer 2% in down payment assistance. And so on an FHA loan, if the three and a half percent is the total, you need to bring 1.5% as the down payment, but all programs are different.

How DP impacts what you can qualify for

So then that brings, the question, we know the minimum down payment, but how's the minimum down payment actually impacts how much house you can qualify for because the larger down payment is the higher purchase price you can actually qualify for. So this is how we can explore that a little bit.

Example Using Max Purchase Price Calculator

So let's run through a quick example using this max purchase price calculator. So here's the Max Purchase Price calculator if you want to try it yourself: https://www.winthehouseyoulove.com/max-purchase-price-calculator.

So let's say we're using a minimum down payment on conventional loans as a first-time buyer, 3% down. And let's say we make $60,000 per year, and maybe we just have a credit card with a minimum monthly payment of $150 a month, just for an example.

And let's say it's just a, maybe it's us. And then maybe we have somebody on the loan with us and they make $30,000 a year. So if we jump over to our dashboard, we could see what the estimated maximum purchase price would be. 343,349, based on what lenders would use to help you look at debt to income ratios.

This calculator explores that a little bit more. So 343 is our baseline right now. What happens then if we change this to let's say 5% down, all of a sudden that bumps it up to 348. No significant changes, but then let's take a look at what if we went to 1500. 378, 358. So we can see how that down payment, the more that we put down actually starts to increase our maximum purchase price.

So that might be something to consider. However, you might be on the other end of saying, actually we just want to be able to get into a home so that we can catch up with appreciation or that we don't have to keep adding more and more monthly savings to be able to catch up to the larger down payment needed if homes continue to appreciate at the same level.

Don't just save but also explore

So no, it's frustrating to see home values, continuing to appreciate. And you're saying like I have the savings, I'm trying to save as quickly as I can, but it's difficult to keep up. Really, the best thing to do is start exploring what loan programs might work best for you.

Again, check all the main 5 loan programs. Start to see what the minimum down payment is and explore if that's an option that you want to take. Maybe the minimum works for you, or maybe you want to save more to catch up with home values appreciating.

Also at the same time, we don't know what appreciation will look like next year. We don't know what home values will do. And so really it's going to be up to your risk level, what you're comfortable with, but the best way to figure this out is the first understand all of the options that are before you, and then make a decision.

Talk with a loan officer
Copyright © 2021 Win The House You Love LLC. All rights reserved.
Only for educational usage. All calculations should be verified independently. Win The House You Love LLC is not a lender, does not issue loan qualifications, and does not extend credit of any kind. This is not an offer to lend and should not be used to make decisions on home offers, purchasing decisions, nor loan selections. Not guaranteed to provide accurate results, imply lending terms, qualification amounts, nor real estate advice. Seek counsel from a licensed real estate agent, loan originator, financial planner, accountant, and/or attorney for real estate and/or financial advice. Read the full disclaimer here.