Down Payments: Know Your Options

As you’re getting ready to buy a home, there are a handful of upfront expenses to keep in mind. That includes your down payment.  

Perhaps the most infamous expense to buying a home, a down payment often deters potential homeowners because of how much money they think they need to save. However, there may be some options available to you when it comes to your down payment.  

To go into the home financing process with confidence, make sure you learn more about down payments, the benefits of a larger down payment and ways to finance your down payment.

What is a Down Payment? 

When you buy a home or make a large purchase, you generally pay some cash up front and then take out a loan to pay for the rest of the purchase over time. The down payment is the cash you need to pay up front and is usually illustrated as a percentage. For example, a 20 percent down payment for a $500,000 home will be $100,000. 

While many lenders require a down payment for a mortgage, there are some types of loans that usually don’t require them.

How Much Should You Put Down? 

You may have heard that lenders require a 20 percent down payment for mortgages, which can feel impossible for some homebuyers. However, this isn’t always the case. The amount of money you put down is dependent on both the loan you take out and are approved for and how much you have saved for a down payment.  

The 20 percent down payment recommendation is ultimately the threshold that lenders use so borrowers can forgo private mortgage insurance (PMI) on a conventional loan.

Benefits of a Larger Down Payment 

Although it’s not necessary to put 20 percent down, a larger down payment for a home usually has its advantages. 

No PMI 

PMI is a type of mortgage insurance that a lender may require you to buy if you take out a conventional loan. This protects the lender if the borrower defaults on their mortgage. You typically need to pay mortgage insurance if you put less than 20 percent down, and this insurance can typically be removed once you have 20 percent equity in your home. But PMI isn’t applicable when you pay at least 20 percent down, saving you some money on your monthly mortgage payments. 

Lower Monthly Mortgage Payments  

When you put more down on a home, you can borrow less on your mortgage, likely meaning a lower monthly mortgage payment. This could help you save more money for other monthly necessities, including bills, groceries and even entertainment.  

Lower Interest Rates 

Your mortgage interest rate is the percentage of your loan amount that lenders charge you monthly for borrowing money. Putting at least 20 percent down on your mortgage may be able to help you secure a lower interest rate from a lender. This is because a higher down payment typically means you’re less of a risk of defaulting on your loan. And even just a slightly lower interest rate can help you save a significant amount of money each month. 

More Attractive to Sellers 

A larger down payment could also tell sellers that you have your finances in order, meaning you could have a competitive edge over other buyers who want to put down an offer on the same property. This is especially advantageous in a busy housing market when it can be difficult to secure a home.

Down Payment Assistance (DPA) 

If you don’t have enough money saved for a down payment, there are other ways you can meet the minimum requirement for your loan or pay more for more potential advantages. Don’t lose hope entirely yet. Homeownership still could be within your reach.  

Receive a Gift 

A friend or family member may be able to gift you money for a down payment, but your lender will likely require a gift letter as well as documentation of the funds transfer. A gift letter is a written statement declaring that the funds are a gift and do not have to be repaid. Double check with your lender about all the documentation you need in order to be gifted money for your transaction. 

Explore DPA Programs  

There are thousands of DPA programs across the country, and many are offered at the state, county or city level. Many of these programs are designed to help first-time homebuyers and borrowers with low to moderate incomes, helping make homeownership more accessible to more people. Find out what kind of programs are available in your state on the U.S. Department of Housing and Urban Development (HUD) website.

Don’t Let a Down Payment Deter You 

A down payment shouldn’t prevent you from homeownership. While it is a significant cost, there are ways to afford the minimum or pay more than the minimum to potentially receive specific advantages. It can be worth it to explore your options and speak to your lender to understand what’s possible. Taking the time to do this research could be a beneficial stepping stone to homeownership.

Down payment assistance requirements are based on the mortgage insurer or guarantor’s guidelines. Down Payment Assistance Program, which assists eligible homebuyers with purchasing a home, may fund down payment and closing costs. Down payment assistance programs are not eligible for all potential homebuyers.