A down payment is a major part of purchasing real estate. Historically, banks wanted or even required a 20% down payment. However, a lot has changed for lenders, the economy and home buyers. The down payment amount necessary to purchase a home depends on several factors. Let’s take a look at a few scenarios to see how much you might need.
Is There an Ideal Down Payment Amount?
You could ask everyone this question and get different answers. Some might say 20%, others 10%, and some might even claim that you should pay for the entire house purchase in liquid cash. The most important answer comes from you and your lender; they need to match to make this transaction possible! As we mentioned, banks historically required 20% down. This was to ensure the financial stability of the applicant; banks wanted proof the applicant would avoid bankruptcy and credit card debt. Luckily, banks are more lenient in their screenings and requirements.
Down Payment Amount Options
There are some loan options that only require 3-5% down. These typically include VA loans, USDA loans and FHA loans. Conventional loans can range from 5% to 20%. Some programs don’t require any down payment. Depending on your qualifications, you may only need a few thousand dollars in cash for the down payment amount. However, that’s just the first step.
Evaluating Your Finances to Determine a Down Payment Amount
Beyond the down payment, there are several things to consider when thinking through buying real estate. Not only do you need a down payment, you will need closing costs, home inspection fees, and many more expenses when you actually get into the home. Consider these financial readiness steps when buying a home:
- Saved enough for a down payment (20% requires no PMI but that doesn’t mean 5% down is a no-go)
- Saved for additional maintenance costs
- Secure employment
- Long-term plans to live there for 5+ years
- Good credit score
- Emergency fund for quick unexpected expenses
- 3-6 months of savings to cover any long-term financial hardships
- Student loan debt paid off or nearly paid off
- Started saving for retirement
- Use a household monthly budget successfully
- Eliminated credit card debt
A mortgage is a big commitment. Make sure you can handle it to avoid any negative ripples to the rest of your finances. Evaluate your financial readiness using the list above along with any other financial standards you want to meet. While each person will qualify or desire different down payment amounts and mortgage sizes, everyone needs to be able to manage the financial responsibility. If you are questioning that decision, wait to save longer or apply for a smaller mortgage. Use a budget to calculate what you can afford as well as what you want to afford to accomplish your other financial goals.