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First-time home buyer down payments start at just 3%

Gina Pogol
The Mortgage Reports contributor

First time home buyers don’t need a huge down payment

First time home buyers get access to many low-down-payment mortgages.

For example, conventional loans let you buy a house with 3% down and a 620 credit score, and FHA loans allow a 3.5% down payment with credit as low as 580.

There are even mortgages for first time home buyers with 0% down. The two most common are USDA and VA loans. However these have special requirements, so not everyone will qualify.

Even if you can’t get a zero-down loan as a first time home buyer, there’s a good chance you’ll qualify with just 3% or 3.5% down.

Find a low-down-payment home loan (Dec 3rd, 2020)

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The basics: What is a down payment?

Unless you can buy your new home with cash, you need financing — a mortgage.

Sometimes, a bank will lend you the entire amount you need to buy a home. This is known as 100 percent financing.

However, most mortgage loans require some contribution from you, the borrower. This contribution — the amount you put toward the house out-of-pocket — is called a “down payment.”

For example, if you purchase a new home for $100,000 and borrow $90,000 (90 percent), you would put $10,000 down on the house. That’s a 10 percent down payment.

What’s the average down payment on a house for a first-time buyer?

Many first-time home buyers believe you need 20 percent down. But when they start exploring mortgage options, they find they can afford a house with far less money out of pocket.

In fact, the average down payment for first-time home buyers is just 6 percent. On a $300,000 home, that comes out to an $18,000 down payment.

And you’re allowed to put down even less. If you have a credit score of 620, you might qualify for a mortgage with just 3 percent down — or $9,000 out of pocket for a $300,000 home.

Thanks to the low-down-payment mortgages available today, many first-time home buyers find the process a lot more affordable than they initially thought.

Don’t forget about closing costs

A down payment isn’t the only out of pocket cost for first-time home buyers. You also need to pay for closing costs.

Closing costs cover all the fees associated with setting up your loan — from the lender’s fees to the appraisal, credit report, title fees, and more.

Closing costs are typically around 2 to 5 percent of the loan amount. (Although, it’s rare for them to be as high as 5 percent unless the loan is quite small.)

This means you should budget for at least 3 to 4 percent of the loan amount in cash, on top of your down payment budget.

For example, if you’re buying a home for $300,000, and you plan to make a 5 percent down payment, you should include around 4 percent for closing costs in your estimate.

  • Home price — $300,000
  • 5% down payment — $15,000
  • Loan amount — $285,000
  • 4% for closing costs — $11,400
  • Total savings needed — $26,000

It’s important to budget for closing costs when you’re planning to buy a home.

Otherwise, your down payment savings could take a big hit when you realize you need to use them to pay for closing costs, too.

Verify your homebuying budget today (Dec 3rd, 2020)

Can you afford a down payment right now? 

First time home buyers often overestimate how much they need for a down payment. Consider the FHA loan, a popular mortgage for first time home buyers that requires only 3.5 percent down.

On a $250,000 house, that’s an $8,750 down payment — almost exactly equal to the amount an average American has in savings: $8,863.

FHA loans aren’t the only first-time home buyer loan with a low down payment, either. All of the following loans let first time home buyers put 5 percent down or less:

Of course, you might decide to pay more than the required down payment for your home loan, depending on your financial goals. A bigger down payment can reduce your monthly mortgage payments and help you save on interest.

But if your main goal is to become a homeowner in the near future, one of these loans could help you achieve your dream sooner than you thought.

Verify your homebuying eligibility (Dec 3rd, 2020)

How much do first time home buyers have to put down?

Some loans let home buyers put zero percent down. But only certain home buyers will qualify for these mortgage programs.

Realistically, most first-time home buyers have to put down at least 3 percent of the home’s purchase price for a conventional loan, or 3.5 percent for an FHA loan.

Imagine you want to buy a $250,000 house. Here’s how much you might have to put down as a first-time home buyer, depending on your qualifications:

Credit Score Debt-to-Income Ratio Loan Type  Down Payment Down Payment $ Amount
500-580 40-50% FHA Loan 3.5% $8,750
630+ Up to 43% Conventional Loan 3% $7,500
620+ Up to 41% VA Loan 0% $0
640+ Up to 41% USDA Loan 0% $0

To qualify for one of those zero-down first-time home buyer loans, you have to meet special requirements.

  • For a VA loan, you need to be an eligible U.S. Armed Forces veteran or service member
  • For a USDA loan, you need to buy a house in a qualified “rural” area — which usually means a population of 20,000 or less — and meet local income limits

But the other two loan types, conventional and FHA, are a lot easier to come by.

You’ll still need to meet credit score requirements as well as employment and income guidelines with one of these, just like any other home loan. But there are no ‘special’ requirements to get a low-down-payment FHA or conventional loan as a first-time home buyer.

How much should a first time home buyer put down?

The amount you put down as a first-time home buyer is up to you. For instance, you might qualify for a conventional loan with just 3 percent down. But then you’d have to pay for mortgage insurance.

Unlike homeowners insurance, mortgage insurance wouldn’t benefit you directly. Instead, it would compensate your mortgage lender if you defaulted on the loan.

If you can afford it, you might decide to make a 20 percent down payment to avoid mortgage insurance. This would lower your loan amount and monthly payment.

Take a look at one example:

First Time Home Buyer Loan Minimum Down Payment  Down Payment $ Amount for a $250,000 house Monthly Payment (Principal & Interest / Mortgage Insurance)*
Conventional LoanWITH Mortgage Insurance 3% $7,500

$1,363

($1,123 / $240)

FHA Loan 3.5% $8,750

$1,311

($1,137 / $174)

VA Loan 0% $0

$1,184

($1,184 / $0)

USDA Loan 0% $0

$1,243

($1,169 / $74)

Conventional Loan WITHOUTMortgage Insurance 20% $50,000

$926

($926 / $0)

*The example above assumes a 30-year fixed-rate mortgage with a 3.75% interest rate

As you can see from the table above, there are certain benefits to making a bigger down payment. Namely, you have a smaller loan amount. That means your monthly payments are smaller.

You’ll also be able to avoid private mortgage insurance (PMI) if you put down 20 percent or more. That can shave another $100 or more off your monthly bill.

But making a smaller down payment has benefits, too — even if they aren’t as obvious.

Benefits of a smaller down payment

When you make a smaller down payment, you keep money in your emergency fund. And you save yourself some money to make improvements and repairs to your new place (which many home buyers end up having to do).

Plus, with a smaller down payment, you can get into a house and start building equity sooner — instead of having to wait up to 14 years to save up the 20 percent down payment requirement.

During those 14 years, the price of real estate will likely continue to rise along with your savings.

Finally, remember that your mortgage isn’t set in stone.

If you want to get into a house sooner, it often makes sense to make a smaller down payment with what you have saved now (or what you will have saved in the near future).

Then, you can usually refinance a few years down the road to get rid of mortgage insurance and reduce your monthly mortgage payment.

In other words, you can get your foot in the door of homeownership with a smaller down payment on your first mortgage loan. Then, after you build some equity, you can transition to a more ‘ideal’ loan.

Verify your home buying eligibility (Dec 3rd, 2020)

First time home buyer down payment assistance 

Here’s the good news: If you’re a first-time home buyer, you might not have to cover the whole down payment yourself.

First time buyers can apply for grants or low-interest loans, called “down payment assistance,” to help with their upfront contribution.

There are more than 2,500 of these first-time home buyer programs nationwide. Many of these programs are run by nonprofits or local governments. Qualified buyers can receive anywhere from $2,000 to more than $39,000 toward their down payment and/or closing cost assistance.

Number of down payment assistance programs by state

Map showing the number of active down payment assistance programs in each state

Source: Down Payment Resource and The Urban Institute

It’s hard to generalize who qualifies for down payment assistance, because all 2,500 programs could have slightly different guidelines. But it’s common for these programs to prefer first time home buyers, low- to moderate-income, and targeted “development” areas.

Look for first-time home buyer programs near you to see what down payment assistance you may qualify for.

These are often run by state and local governments, and can be found by Googling “down payment assistance grants in [state, county, or city].”

Using gift funds to cover your down payment 

Many first-time home buyer programs let you cover the whole down payment with gift funds.

For example: If you’re buying a $250,000 home with a 3.5 percent down FHA loan, your entire $8,750 down payment could be a gift from your parents.

  • The Conventional 97 loan and Freddie Mac Home Possible also allow 100 percent of the down payment to come from gift funds
  • Fannie Mae’s HomeReady loan, by contrast, requires a 3 percent borrower contribution at minimum. That means you’d have to pay at least $7,500 toward the $250,000 home out of pocket

Gift money can come from a parent, friend, employer, or anyone generous enough to help you out with your home purchase.

However, if you’re going to use gift funds toward your down payment, they have to be properly documented by the gift giver and the home buyer. That means writing a “gift letter” to show your mortgage lender the money came from a verified source.

This extra step in your home buying process will be worthwhile. Be sure to let your loan officer or real estate agent know early in the process that you’ll be using gift funds for a down payment.

First-time home buyer programs

As a first-time home buyer, you can choose how much money you want to put down towards the purchase price. 

The down payment can be as large as you wish, or as small — so long as you make the minimum investment required by your lender and loan program.

The six most common low- and no-down-payment mortgages used by first-time home buyers are the FHA loan, the VA loan, the USDA loan, the Conventional 97, and the HomeReady or Home Possible mortgage.

Each is described below.

FHA loans — 3.5% down payment 

FHA loans require a down payment of 3.5 percent of the purchase price at minimum.

With backing from the Federal Department of Housing and Urban Development (HUD), FHA loans are popular with first-time home buyers because the program allows below-average credit scores.

If you have a 580 credit score or higher, you can get approved for an FHA loan with just 3.5 percent down.

And some lenders will even allow credit scores of 500 to 579, if you can make at least a 10 percent down payment.

Thanks to these perks and others, FHA mortgage approval standards are considered the most friendly toward first-time buyers.

Find out if you qualify for an FHA loan. Start here (Dec 3rd, 2020)

VA loans — 0% down payment

VA loans are available to members of the U.S. military and veterans of the Armed Services.

These mortgages provide a 100 percent financing option — meaning zero down payment — and VA mortgage rates are often lower than those of other programs.

Another big benefit for first time home buyers is that VA loans don’t require ongoing mortgage insurance.

Unlike FHA and USDA loans, which both charge mortgage insurance every month, the VA loan simply has one upfront “guarantee fee” and that’s it.

Without the monthly mortgage insurance fee, homeowners can save thousands over the life of their loans.

Find out if you qualify for a VA loan. Start here (Dec 3rd, 2020)

USDA loans — 0% down payment 

USDA or “Rural Housing” loans also allow 100 percent financing. The program is available for homes in rural areas and less-dense suburban neighborhoods nationwide.

The U.S. Department of Agriculture, which backs these mortgages, usually defines “less populated” as an area with 20,000 residents or fewer.

Another important guideline for USDA loans is the income limit. To qualify for a Rural Housing mortgage, you can’t make more than 115 percent of the local median income (meaning you’re 15 percent above the median).

USDA mortgage rates are often as low as VA mortgage rates. And mortgage insurance for USDA loans tends to be cheaper than for FHA loans.

Find out if you qualify for a USDA loan. Start here (Dec 3rd, 2020)

The Conventional 97 loan — 3% down payment 

The Conventional 97 loan is, like the name implies, a type of conventional loan. These mortgages are backed by Fannie Mae and Freddie Mac.

Available to home buyers with a good credit score of 620 or higher, the conventional 97 loan requires just 3 percent down. And it lets you cover the whole down payment with gift funds, if you wish.

The HomeReady and Home Possible mortgage — 3% down 

The HomeReady and Home Possible mortgages are two other conventional loan programs with 3 percent down payment requirements.

These are geared toward lower-income and/or multigenerational households, but all home buyers are welcome to apply.

The HomeReady program is backed by Fannie Mae and Home Possible by Freddie Mac. These loans may require borrowers to complete homebuyer education course during the application process.

Home buyers using either HomeReady or HomePossible get access to discounted mortgage rates, and can use the income of boarders and other household residents to help meet the lender’s household income requirements.

First-time home buyer down payment FAQ

Where can I find down payment assistance?

There are about 2,500 first-time homebuyer programs around the nation offering down payment assistance. These are typically run by state and local governments. Find programs near you by Googling “down payment assistance in [my city or county].” Or ask your Realtor for a list of options.

Many down payment assistance programs offer grants or forgivable loans — meaning the money you use to cover your down payment might not need to be repaid.

Is it better to pay a down payment or closing costs?

You’ll have to cover the down payment and closing costs when you purchase a home. Closing costs, which cover things like lender fees, appraisal, credit reporting, and title fees, typically total 2 to 5 percent of the loan amount.

Many down payment assistance programs can be used to help pay for closing costs as well. Or, you may be able to negotiate that the home seller covers part or all of your closing costs. (But this typically only happens in a buyers’ market.)

Can I use FHA, USDA, or VA loans for a vacation home?

Low-down payment government loans, including FHA, USDA, and VA, are designed to help buyers purchase primary residences. That’s a home you plan to live in full-time. As such, these government-backed loan programs cannot be used to buy vacation homes or investment properties.

Do I need a cash down payment to refinance my home?

No, but you do need enough home equity to meet the requirements of your mortgage lender or loan program. For example, if you owed $190,000 on a $200,000 home, you would have only $10,000, or 5 percent equity, which wouldn’t be enough for most refinance loans.

Most conventional and FHA refinance loans require at least 20 percent of the home value in equity before you can refinance.

Will a down payment lower my monthly payments?

A down payment will lower the amount you borrow which, in turn, can lower your monthly payments. For example, if you make a 20 percent down payment on a $200,000 loan, you’re borrowing only $160,000. That will result in lower payments spread over 30 years than if you were paying off a larger loan amount over the same time period.

Other factors such as your repayment terms and interest rate also affect your monthly mortgage payments.

Find a low down payment loan that works for you 

First time home buyers have lots of options when it comes to making a down payment. 

To minimize your out-of-pocket cost, make sure you research your loan options thoroughly, as many require just 0 to 3 percent down.

Then make sure you find a participating lender who offers the loan program you need.

And don’t forget to look into down payment assistance options near you. Help is available for first time home buyers who know where to look for it.

Verify your new rate (Dec 3rd, 2020)

Step by Step Guide

First-Time Home Buyer