Last Updated on May 24, 2023 by Bob Filipczak
The average down payment on a house in the United States used to be a straight-up 20 percent. But that doesn’t really work for a lot of people anymore. With the price of homes today, a 20 percent down payment puts buying a home out of reach, especially for first-time home buyers. Lenders have become more flexible and there are even some programs that feature no down payments if you qualify. Before you throw up your hands and think you’ll never be able to afford to buy a home, let’s take a look at the changing landscape of down payments.
Median: Alternative to Average Down Payment on a House
If you want a hard number for the median* down payment on a home, it’s 13 percent. That’s what the National Association of Realtors came up with. If you want a dollar amount, the median down payment was $26,000 at the end of 2021, according to ATTOM Insights. Like a lot of statistics, however, it doesn’t tell the whole story. More importantly, it probably doesn’t reflect your story in that there are a lot of variables that can help you come up with an affordable down payment and make a new house possible.
*The median indicates the point where half of the down payments are above and half are below. It’s often a more useful number than an average down payment on a house for a first time buyer.
Median Down Payments by Age
When it comes to down payments, age plays a role in determining the typical percentage you might pay. For example, younger first-time buyers tend to put down smaller down payments compared to older individuals or families. According to recent statistics, the median down payment for buyers aged the following were:
- 23-31 Years: 8 percent
- 42-56 Years: 15 percent
This makes sense when you think about it. Older home buyers often have a home to sell, and they can use the proceeds from that on the next house. They are called repeat buyers and can afford a higher average down payment on a house.
Government-Backed Loans Where You Have Zero Down Payment
Various government programs exist to assist homebuyers in achieving their dreams of homeownership. These programs offer reduced down payment requirements (sometimes zero %), making it more accessible for individuals and families with limited financial resources. Knowing the requirements for these programs can help you find the right fit. Here are the most well-known loan programs:
VA Loans
This loan program is reserved for those in the armed forces and retired armed forces personnel like veterans. That includes:
- Army
- Navy
- Marines
- Air Force
- Coast Guard
- Space Force
- National Guard
- Veterans
- Reserve members
The surviving spouses of a service member killed in the line of duty are also sometimes eligible. The benefits of the VA loan are substantial. First and foremost, with the VA loan guarantee, you will have no down payment.
In addition, VA loans come with reduced mortgage interest rates and private mortgage insurance is totally waived. These three benefits alone can save you thousands up front and tens of thousands of dollars over the life of the loan. For more information, we have a complete list of VA loan benefits.
USDA loans
This national program is for anyone who wishes to buy a home in a rural area. These loan guarantees also have no down payment The loans are guaranteed and insured by the USDA, while the loans themselves come from private lenders and banks. What’s rural, exactly? The USDA defines “rural” as a town with a population of less than 35,000 people and that includes 97% of the United States.
If you want to buy a home in a rural area, you can find out if that area is eligible for a USDA loan guarantee by checking their map.
The USDA loan guarantee does have limitations for income levels and are generally reserved for those with moderate or lower incomes. The eligibility for these loans is spelled out clearly on their site.
Programs with Only 3% Down Payment
FHA Loans
An FHA home loan is a loan insured by the Federal Housing Administration and given by an approved lender. These loan guarantees are designed for low to moderate-income earners who also have low credit scores. The combination of a low down payment and relaxed credit requirements make the FHA loan guarantee ideal. Some of the benefit include:
- Smaller Down payments – FHA has a minimum down payment of 3.5% of the total home loan. Your down payment percentage may vary if you have a credit score below 580.
- Flexible approval requirements – The qualification criteria are not as strict as you find on conventional loans.
- Lower credit scores – If you have a low credit score and cannot get a loan from conventional lenders, the FHA loan was designed with you in mind.
- Not just First Time Home Buyers – The FHA program is for everyone, not just first time homebuyers.
Conforming Loans
Conforming loans are a type of conventional loan offered by most mortgage lenders. There are particular conforming loans called Conventional 97 loans. These only require a minimum 3% down payment and are available to homebuyers who meet the eligibility restrictions.
- Fannie Mae HomeReady Loans are for buyers with lower incomes who have a credit score of at least 620 and who complete homebuyer counseling.
- Fannie Mae 97% LTC Standard loans help first-time homebuyers with credit scores of 620 or higher.
- Freddie Mac Home Possible Loans are available for those with credit scores of 660 or higher, who live in underserved areas, or whose income is below a set limit.
- Freddie Mac Home One loans are for first-time homebuyers who enroll in and complete homebuyer education. These loans are available for single-unit homes that the homebuyer will live in.
Fannie Mae and Freddie Mac are quasi-governmental private companies who buy mortgages and, thereby, set some of the rules about lending and borrowing.
When to Go to 20 Percent For Your Down Payment on a House
Sometimes it makes sense to put a 20% down payment on a home if you can afford it. The first benefit of hitting that mark is you can avoid private mortgage insurance (PMI), which can add additional hundreds of dollars to your monthly mortgage payments. Paying 20% up front also means you are borrowing less, which will cost you less in interest payments over the long run. With that larger down payment you may also be able to negotiate a lower interest rate with your lender. That’s a big deal.
Private Mortgage Insurance (PMI)
Private Mortgage Insurance, or PMI, is an additional fee often required when a buyer puts down less than 20% of the home’s purchase price. It helps protect the lender in case of default. The cost of PMI varies depending on factors such as loan amount, credit score, and down payment percentage. It’s important to consider the impact of PMI on your monthly mortgage payment and overall affordability. You only pay PMI as part of your monthly payment for the first few years of your mortgage. Once you reach the point where you’ve paid off about 20% of the loan, you can stop paying PMI. The average monthly payment for private mortgage insurance is between $125 and $375, so it adds up fast.
Gift Money Helps Increase Average Down Payment on a House
In some cases, homebuyers may receive gift funds from family members or close friends to contribute to their down payment. Whether you can do that or not is up to the mortgage lender, so discuss it with them up-front. There are specific guidelines and regulations surrounding gift money, so it’s a good idea to do your homework. Lenders often require a gift letter and documentation to ensure the funds are a gift and not a loan.
Co-borrowing
Co-borrowing is another option to consider when it comes to down payments. This involves partnering with a trusted individual, such as a family member or close friend, to purchase a home together. By pooling resources, co-borrowers can combine their down payments, increasing their purchasing power and potentially achieving homeownership sooner. Unlike cosigning on a loan, co-borrowing means both people own a piece of the home even if only one person is living there.
Earnest Money is Not the Same as Your Down Payment
Earnest money is a deposit made by homebuyers to demonstrate their commitment and seriousness in purchasing a property. It is typically submitted early in the process when making an offer on a home. It is held in an escrow account until the transaction is finalized. Unlike a down payment, earnest money is a smaller amount, usually around 1-3% of the home’s purchase price. It serves as a sign of good faith, and It is typically rolled into the down payment or closing costs. When you are doing the math on your down payment, your earnest money can be part of it, but it’s only available at closing.
Emergency Fund
This is a hard one, especially if you are scraping everything you’ve got together for the down payment. While focusing on saving for a large down payment, it’s crucial not to overlook the importance of maintaining an emergency fund. Unexpected expenses can arise during homeownership, such as repairs, maintenance, or job loss. Having an emergency fund in place provides a financial safety net and ensures that you can handle unforeseen circumstances without jeopardizing your ability to make mortgage payments.
There are dozens (maybe hundreds) of calculators out there that help you figure out the particulars of affording a mortgage and the down payment. By carefully evaluating your financial situation, goals, and available resources, you can determine the appropriate down payment amount and navigate the home buying process with confidence. Remember to prioritize an emergency fund to protect your investment and provide peace of mind in your new home.
Homes for Heroes
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