What Are My Down Payment Options for New Homes?

Buying a new home is very exciting. Besides selecting the perfect neighborhood and making sure you get the best house for you and your family, there are lots of financial things to take into consideration. One of the most important things to plan for is your down payment. Home loans come in all shapes and sizes. Let’s go over the most common top three options borrowers choose.

Down Payment Option One – 3.5%

One of the least expensive ways to get into a new home is by taking advantage of an FHA (Federal Housing Administration) government loan. This type of mortgage only requires that you put 3.5% down. On a $250,000 mortgage, that’s only $8,750, which makes getting into a home extremely affordable, especially for first-time homebuyers. One thing to keep in mind with an FHA loan is that you will have to pay monthly private mortgage insurance for the life of the loan. Private mortgage insurance (PMI) protects the lender in case of default - it’s not the same as homeowner’s insurance. This type of insurance is required when you put down less than 20%. But, even with the extra insurance, an FHA loan is still an excellent choice.

Here are the three top reasons so many borrowers choose this loan:

  1.  The interest rates on FHA loans are some of the lowest.

  2.  Your credit doesn’t have to be perfect, and you can get a loan if your score is in the low 600s.

  3.  Waiting time for bankruptcy is only two years.

Our government created FHA loans to help borrowers get into a home who may not otherwise be able to qualify. So, if you’d like to put as little as possible down and would love to buy instead of rent, consider this type of mortgage. This type of loan is for your primary residence. You can’t buy investment properties or second homes with an FHA loan.

Down Payment Option Two – 5%

The next option is a conventional loan through Fannie Mae or Freddie Mac. With this type of loan, you need to come up with 5% down, which is a little bit more of a down payment than you do with an FHA loan. So, for a $250,000 mortgage, you’ll need $12,500. There are a few significant differences, though. One is that although you will initially be required to have mortgage insurance, once you have 20% equity, you can request that the mortgage insurance is removed. That can save you a hundred dollars or more a month, depending on the size of your loan.

Unlike an FHA loan, the credit requirements are stricter. You’ll need a score of at least 650. The waiting time for bankruptcies is longer at four years.

And although with an FHA loan, you can only fund for primary residences, with a conventional loan, you can buy a home as a second home or an investment property. One advantage of putting less down is that you can have more money on hand to make needed purchases once your loan closes. For example, maybe you’ll need a new patio set for the backyard, or a larger big-screen TV. Having more money on hand could be your best choice.

Down Payment Option Three – 20% Down

The third option is to put down at least 20% on a conventional loan. That is often possible if you’ve just sold your last home and are buying a new one. With 20% on a conventional loan, you avoid private mortgage insurance from the start. Remember - an FHA loan has PMI for the life of the loan no matter how much you put down. Plus, when you have a larger down payment, you’ll be able to get the best rates. The reason for that is that the more money you put down, the less risk there is for the lender.

In addition to avoiding PMI, you’ll also enjoy some of the best conventional rates available. Of course, your interest rate will depend on your credit score, but having a more substantial down payment is very appealing for your lender because they have less risk.

When you can put down 20% or more on your home, you’ll also be able to qualify for a larger mortgage. So, if you have your heart set on a larger home with more room for you and your family, you could be in luck.

So, whether you have a little to put down or a larger down payment, there are plenty of options. Ready to learn more about mortgages? Check out our guide on how to get a great home loan.

Contributed to Your Home blog by Carol Youmans

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Published 2.12.2020