How Much Do You Really Need For A Down Payment?

Are you considering buying a home? Then you’ve probably heard about the term “down payment.”

To help you, we’ve broken down everything you need to know before making a down payment.

This includes explaining how they work, the pros and cons of making a large or small down payment, and the types of loans that provide them.

What is a Down Payment?

A down payment is the upfront, non-refundable amount you pay when buying a house. It’s usually a percentage of the entire cost of buying your home.

Putting money down on a house minimizes the lender’s risk. Hence, the more money you put down, the better your chances with your mortgage insurance lender should be.

How Do Down Payments Work?

When you apply for a mortgage, your lender will request that you make an upfront payment before they approve your loan.

Your down payment amount will determine how much money you borrow, which affects the interest you pay on your loan. The more money you pay upfront, the smaller your loan amount. The smaller your loan amount, the more you can save on your mortgage interest rate and monthly payments.

Note that your down payment amount is not only determined by your financial state. How much you pay as a down payment can also depend on the type of loan you’re applying for, the entity providing the loan, and your preferred mortgage lender of choice. Usually, the seller receives their down payment funds when the sale is finalized.

Is The 20% Down Payment a Myth?

Many lenders prefer borrowers to pay 20% of the purchase price. It’s considered the traditional down payment for a house. However, saving up to a 20% down payment can be daunting, especially if you’re a practicing physician still trying to pay off student loan debt. 

Thankfully, several lenders request less than 20% of the purchase price as a down payment. A 2023 report by the National Association of REALTORS revealed first-time buyers had an average of 8% down payment, while return buyers made an average of 19%.

Making a 20% down payment is up to you. You should effectively weigh the pros and cons before coming to a decision.

Pros and Cons of Making a Large Down Payment

For most people, a 20% down payment is regarded as large. Even if you can afford it, you should consider the pros and cons first.

Pros of Making a Large Down Payment

Some advantages of a higher down payment include:

Better Loan Terms

The larger your down payment, the less payment assistance you’ll need. A smaller loan balance translates to a lower monthly mortgage payment. Also, larger down payments make you more attractive to lenders and improve your chances of scoring a lower interest rate. It also reduces the amount of interest paid over the life of the loan.

Competitive Edge

A larger down payment shows you pose less risk to the lender, making them more likely to approve your loan. Also, home sellers prefer to work with buyers who make larger down payments, giving you a competitive edge.

Little or No Private Mortgage Insurance (PMI)

Private mortgage insurance (PMI) protects a lender if the borrower defaults on their loan agreement. It involves making monthly payments in addition to your mortgage payments until you reach at least 20% equity on your home. With a bigger down payment, you pay less private mortgage insurance.

Fortunately, you only have to pay private mortgage insurance when your down payment is less than 20%. When it’s 20% and above, you save on mortgage insurance, which translates to smaller monthly payments.

Cons of Making a Large Down Payment

Consider these disadvantages of making a bigger down payment.

Less Money for Other Costs

Dropping a larger down payment can stretch your finances very thin and leave you with fewer funds to take care of other expenses like renovations, decoration, and moving. Average closing costs can add up to almost 6% of your total loan amount. Spending a lot on a down payment can cause you to struggle with these other expenses.

It Takes Longer to Save Money

You might have trouble saving for a higher down payment. It could take longer, which can backfire. Home prices may continue to rise as you attempt to save for a larger down payment, making your dream house more expensive.

Reasons To Consider A Smaller Down Payment

There are a couple of reasons you should consider a smaller down payment. For starters, opting for a home loan that allows smaller down payments helps you buy a home sooner. The smaller your down payment, the shorter it will take to save up for it. This can help you save on rising home prices.

Also, a smaller down payment gives you more money to cover closing costs, moving expenses, renovations, emergency funds, and other future expenses. It’s never wise to empty your savings account on a down payment for a home.

Down Payment Requirements for Different Loan Types

There are different types of loans. Each type has its specific requirements for down payment and interest. Also, note that the down payment requirements will differ depending on whether you’re buying an investment property or a primary or secondary residence.

Primary residences usually have lesser down payment percentages, which differ with the loan type. However, secondary residence loans are stricter and require you to remit at least a 10% down payment. Note that guidelines for what counts as a secondary home and what doesn’t are quite strict. You should confirm with your broker before making a final decision.

If you’re taking a loan for real estate investment property, the stakes are higher and guidelines are more rigid. You’ll need a down payment of at least 20 to 25% to qualify. However, if your credit score is above 720, you might qualify for a down payment of 15%.

Usually, you can only use FHA or VA loans to buy investment properties when acquiring a multifamily home you plan to live in. Some loan types and their down payment requirements include:

Loan Type	Minimum Down Payment Requirement
Conventional Loan	3%
FHA Loan	3.5%
USDA and VA Loans	0%
Jumbo Loan	10%
Doctor Mortgage	0%

Conventional Loan

Conventional loans, also called conventional mortgages, aren’t backed up or insured by the government. This means they are not part of any government program and are instead offered by private lenders.

Some conventional mortgages request as low as a 3% down payment from first-time buyers who meet some predetermined income limits. Second-time buyers may also get a down payment percentage as low as 5%.

Although the federal government does not back them up, they follow guidelines set by government-sponsored enterprises like Fannie Mae and Freddie Mac. Private lenders offer conventional loans, which is the most common type of mortgage loan.  

FHA Loan

FHA loans, like conventional loans, are also acquired via private lenders. However, they are guaranteed by the Federal Housing Administration.

FHA loans require a minimum mortgage down payment of 3.5%. However, you must have a credit score of at least 580 to qualify. Borrowers with credit scores between 500 and 579 will put down at least 10%. FHA loans only apply to primary residences.

VA Loan and USDA Loan

The United States Department of Veterans Affairs (VA) and the United States Department of Agriculture (USDA) offer loans with a 0% down payment. To qualify for a VA loan, you must have been an active service member, a U.S. military veteran, or, in some cases, a surviving spouse. VA loans don’t require monthly mortgage insurance.

The USDA home loan is available to low- and moderate-income households who wish to buy homes in eligible rural areas. Houses with low incomes may apply for subsidized loans under this program. They usually require a credit score of at least 640. VA and USDA loans can only be used to purchase primary residences.

Jumbo Loans

Jumbo loans exceed the conforming loan limit set by the Federal Housing Finance Agency (FHFA). Different mortgage lenders have different requirements for the down payment on jumbo loans They have a minimum down payment of 10% that can go as high as 20%.

Doctor Mortgages

Doctor Mortgages are available to high-paying professionals like doctors, physicians, and veterinarians. These loans are characterized by fewer restrictions, little or no down, and no monthly mortgage insurance payment in exchange for a slightly higher interest rate.

It’s perfectly suited for medical practitioners who are still paying off their student loans and have a high debt-to-income ratio.

Final Thoughts

Several factors determine how much you need for a down payment. While depositing a sizable percentage of a down payment is advisable, you can get your dream home before saving up to 20%.

Physicians Thrive can provide the guidance you need to effectively plan and manage your finances while you focus on growing your practice.

Contact us today for expert guidance on the mortgage options best suited for you.