What's The Typical Down Payment On A House?

Certified Mortgage Advisor
NMLS 1701021
January 17, 2020

Let's talk about down payment

Hearing you have to bring a down payment to buy a house is one of the most intimidating things that buyers face when they look to purchase a home. So, we're going to talk about the average down payments for regular home buyers, and first-time homebuyers along with the minimums.

What's the typical down payment?

Let's go ahead and dive into what is the typical down payment. So first let's talk about the averages. The national association realtors put out in this study, they said 88% of recent buyers finance their home purchase.

Those who finance their home purchase typically financed 90%, meaning they put 10% as a down payment. And then they went on to say that first-time buyers who finance their home typically financed 95% of their home compared to repeat buyers at 86%.

Down payment for second home buyers

What are second home buyers? They are the people who already have a home that they purchased and they're purchasing a new one. So what they're saying here is the average for second-home buyers. The average down payment is 10%.

Down payment for first-time home buyers

And for first-time buyers, it is 5%. So those are the averages. Normally a first-time buyer is going to put down 5% at anyone who's purchasing a home after that normally puts around 10% since they have some equity built up.

By a percent and 10% are not the requirements. If you're saying that's too much for me, there are minimums that are on down payments. So let's cover some of those minimums.

0% down

First, let's talk about 0% down. 0% down loans, you're going to find with VA and USDA. So these are kind of niche loans. VA loans are only for veterans. USDA loans are only for rural areas. They also have an income cap and a couple of other restrictions that make them difficult to use, but they allow you to do 0% down.

Any other loans that do 0% down that you might find like down payment assistance are going to be very costly over a long period of time compared to government-backed programs like VA or USDA.

3% down, how?

For 3%, if you're a first-time homebuyer, you can get a conventional loan for 3% down. And if you're not a first-time home buyer, you can actually get a conventional loan for 3% down. As long as you don't go over an income limit for your area called the home ready home possible income limit. So that's 3% perfect for conventional.

3.5 % for FHA

For FHA, the minimum down payment is 3.5%. No matter if you're a first-time homebuyer or not.

5 % for Conventional

5% is the standard down payment for conventional. If you are not a first-time homebuyer or you exceed the income limit. So 5% is going to be standard on conventional.

15% for investment properties

So here's a big misconception. People think that investment properties require 20%. They only require 15%, the same thing. Everyone says 20% is the golden standard of down payments. And they think that 20% is the requirement when it's not, you can get an FHA loan for 3.5% down at conventional loan for 3% down a VA loan or USDA for 0% down.

What can 20% do?

What 20% down does for you though, is it removes mortgage insurance. Mortgage insurance is a monthly amount that's going to be charged to you to make sure that if you ever default on your loan, that the lender has some insurance to recover some of their money because when you put less than 20% down, that loan is riskier.

So averages first-time, home buyers, 5% anyone else's 10%. Minimums, you don't have to even hit the 5% or 10% marks. You can go a lot lower.

Now let's talk about budget

Your budget should be something that you keep in mind when you're looking at how much you should put down on a home.

More cash? Explore!

Sometimes it's great to go with the minimums to have some pre-cash, but if you have extra cash to put down, start exploring what a higher down payment will do for your budget.

Higher down payment: why it's so much better

Because the higher, your down payment is the lower your monthly payment is, and they work in inverse correlation to each other. So if you put a low down payment, you're going to have a higher monthly payment. You also pay more over the life of the loan. If you put down a small, down payment.

Consider paying your debt first

Also, keep in mind what debt you have. If you have the ability to put 20% down on a home right now, but you also have several thousand dollars in credit card debt. What I would suggest is to pay off that credit card debt and then use the rest as the equity on your home. Because here's the deal, if you're paying something that's high-interest credit card debt, you're going to be paying about 20% on that debt compared to your down payment is only going to earn maybe three to 4% per year.

Obviously, we want to pay off the 20% costs and not throw it into just a 4% return. Also, consider your monthly savings. If you're paying off debt with the money that you could use for a down payment, you're going to free up a lot of cash flow each month that you could use to qualify for a larger home.

Where do we get our down payment?

Now let's talk about the source. So where are these down payment funds coming from? So National Association of Realtors says 43% of buyers saved for their down payment in six months or less. So we can see that it took a period of time for people to save up that money.

They also said for 59% of buyers, the source of the down payment came from their savings. 38% of buyers cited using the proceeds from the sale of a primary residence, which was the next most commonly reported way of securing a down payment.

Have time to save for your down payment

So for most people, they're taking that money from their savings account and they're saving it over a period of time. So if you don't have that down payment money right now, then you have time to save it. Look at your budget over the next few months. How quickly can you build up some savings for a down payment, because it might not always be immediate. You might have to have a long-term plan in place. Sometimes people save up for a down payment for. 2 3, 5, 10 years. It really depends on what your time horizon looks like and what your budget looks like as well.

So let's talk about where can we get these funds?

Obviously you can get them from your savings account. You could get them from a property that you have currently. So if you're selling that home and moving into a new one. Your first time home buyer, that won't work. You could also get these funds from something like a 401k or an IRA you could borrow against a retirement accounts.

A very common way that you can find down payment funds is to get a gift from a relative where they will give you a gift of funds that you can put as a down payment. One thing you have to watch out for is you can not use any borrowed money, so you can't go take a loan for your down payment. It simply doesn't work like that. It has to be your money.

What's positive about down payment

Finally, a lot people correlate down payment as a fee. They see a down payment and they think, "oh my gosh, I have to get rid of this money". That money is yours. It's now secured in an asset that you have access to when you sell the property. And the nice thing about those funds is instead of them sitting in your bank account, they're actually going to earn appreciation in your property somewhere to the tune of maybe three to 4% per year, on average in your home.

Since you're borrowing most of your mortgage, that's really solid cash-on-cash return that you're receiving because your property is appreciated at 3 to 4% per year. And your cash portion is actually only a small amount of that, meaning that your cash on cash return is a lot higher. That's why people talk about real estate being an investment is because you're leveraging funds to get higher cash on cash return. So your down payment is not a fee. Your down payment really is an investment for you and your family's future.

How to compute your down payment

So let's talk about one more thing about how down payments are structured. So when we're talking about the value of your property, let's say the value of your property is $200,000. The value of your property is made up of your mortgage. Plus your down payment to equal the value.

So if the property is worth $200,000 and we put down a $10,000 down payment, we have a $190,000 mortgage. If your property values are worth 200,000 and our down payment is $10,000. Our mortgage is for $190,000. So they stack on top of each other. So if you only have $5,000, then you need a $195,000 mortgage for a $200,000 property. Because sometimes we will ask, can I just wrap my down payment into my loan and it doesn't work like that your loan is separate from your down payment and they stack on top of each other.

I hope this clears up just some ideas of what's the typical down payment. That way you can know what is everyone else doing also, what are the minimums, but what it really comes down to is what is your budget, and what is going to be comfortable for you moving forward.

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