How Much of a Down Payment Will I Need to Buy a House?

The question of how much down payment is needed to buy a house is one of the most common that I hear from prospective home buyers – and for good reason! Obviously, it’s important to know how much money you’re going to be expected to bring to the closing table to complete the purchase of your new home.

How much you’ll need to bring in for a down payment depends on the type of loan you select and your credit qualifications. You’ll also likely need to cover closing costs as well, though you may be able to get the seller to cover some of them for you.

FHA Offers Lower Down Payments And More Flexible Credit Standards

FHA is a great option for purchasing a home, particularly for first-time homebuyers, because it offers competitive rates, lower down payments, and less restrictive credit standards than other types of financing. If you wish to keep more of your cash in your pocket when purchasing a home and/or you have some minor bruises on your credit, FHA may be a great option for you.

The minimum down payment with an FHA loan is 3.50% of the purchase price. However, for the privilege of making a low down payment you’ll be required to pay for mortgage insurance – and not just once, but twice.  You’ll have to pay a mortgage insurance premium at closing called Upfront Mortgage Insurance Premium (UFMIP) as well as an Annual Mortgage Insurance Premium (MIP) that you’ll pay as part of your monthly payment.

Have Stronger Qualifications? Conventional Financing Might Be Better

If you have strong credit qualifications, conventional financing might be a better option for you. With a conventional loan, your down payment can be as little as 5% (or even just 3%, if you have stellar qualifications) of the purchase price if you’re purchasing a single-family home, condo, or townhome that you intend to live in.

While UFMIP never applies to a conventional loan, private mortgage insurance (PMI) applies to any loan with a loan-to-value greater than 80%. In other words, you’ll need to come in with at least 20% down to avoid having mortgage insurance as part of your monthly mortgage payment.

What You’ll Need to Pay at Closing

Many home shoppers, particularly first-time home shoppers, mistakenly think that to close on a new home purchase they just need to write a check for the down payment.  For instance, if you’re purchasing a $200,000 house and you’re taking out a 3.5% down payment FHA loan, you’re just going to need to come to the closing table with $7,000, right? Wrong! There’s more to the story, so I want to set realistic expectations. Not only do you need to come up with the down payment itself, but you’ll also need to cover some other stuff too.

The following is rundown of what you’ll need to cover at closing for FHA and conventional financing:

  • Down payment – This can be as little as 3.5% of the purchase price for FHA and 5% for conventional.
  • 3rd Party closing costs – Depending on the bank and loan scenario, the lender may be able to cover these (this is easier for the bank to do on larger loans), or they can be as much as 2%-3% of the loan amount.
  • Prepaid deposits for taxes and insurance – If you’re planning to have your taxes and insurance paid automatically by your lender, you’ll need to make an initial deposit into your impound account. I usually like to plan for 4 to 6 months worth of property taxes and insurance, but it could end up being less.
  • UFMIP (FHA only) – If you’re going with FHA financing and prefer not to finance the UFMIP, you can opt to pay it at closing.

It’s important to note that when purchasing a home, pretty much everything is negotiable with the seller. If you’re in more of a buyers market, it may be possible to get the seller to cover some of your financing costs. Consult with your real estate agent for more information about this.

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About Mark Fitzpatrick

Mark Fitzpatrick is a reverse mortgage professional with over seven years of experience in mortgage banking. In his spare time he enjoys reading, skiing, surfing, and spending time with his family and friends. You can stay current with Mortgages By Mark by getting free email blog updates or subscribing to my RSS feed. NMLS #382064.
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