How Much Down Payment Do I Need for a House?

by on April 22, 2012Jason Van Steenwyk

down payment for a houseLenders like to see the borrower have some skin in the game. With borrowers upside down on their homes simply mailing their keys back to the bank, and sticking lenders with negative equity rather than toughing out the down market and keeping their homes, lenders now want to know that you’ve got a personal stake in the deal.

By the way … those “no money down” property flippers? The ones who were so obnoxious about six years ago? Yeah, those people and their amateur mortgage brokers are making your lattes at Starbucks now – and sending their tips to a bankruptcy trustee, in many cases.

As such, unless you fall into a couple of special categories, chances are you’re going to have to come up with some cash as a down payment on your home.

Underwriting Standards Have Tightened

Don’t count on trying to get cute. The days of trying to camouflage the fact that you have no personal stake in the property by taking out a piggyback loan to boost your down payment from 3 percent to 10 percent are pretty much over. That didn’t work out well for lenders, and we’re in a back-to-basics market now. “Ever since the collapse, if you will, there’s no real creative financing like there used to be four or five years ago,” says Erick Perpich, a Sacramento-area loan officer with Republic Mortgage.

“I haven’t seen a piggyback loan in years,” echoes Kimberlie Snyder, a Washington, D.C. underwriter with Bank of America, who primarily handles VA and FHA loans. “I know on conventional loans, we don’t do piggies either.”

No Down Payments on VA Loans

You can still do a no-down payment mortgage via a Veterans Administration home loan. This is because the federal government stands behind the nation’s veterans, guaranteeing the lender against loss if the veteran should default on the loan. VA home loans have the additional advantage of allowing the borrower to avoid paying primary mortgage insurance premiums, or PMI. This can easily save a borrower over $1,000 per year in many markets. Otherwise you’d have to pay these premiums until your loan-to-value ratio reached 80 percent.

The downside to VA loans is that normally you cannot discharge this debt in bankruptcy as you can with other kinds of debt.

One alternative no-money-down option you may wish to explore: The USDA Rural Development Loan. This program will allow you to borrow up to 100 percent of the value of the property, if you qualify, just like a VA loan. The program only covers homes in certain designated rural areas. Your family income must fall at or below 115 percent of the median income for your area. Loans are for 30 years at a fixed rate of interest, and you can roll expected repair and improvement costs into the price of the loan. This isn’t a giveaway program: You have to have decent credit to qualify.

Funding for this program tends to run out midway through the fiscal year, though. For best results, try to apply early in the U.S. government’s fiscal year, which begins October 1 every year.

How Much Down Payment is Needed for FHA Loans?

If you obtain your loan under Federal Housing Administration auspices – the so-called “FHA loan,” you may get into a home with just 3.5 percent down. This still means you’ll need $7,000 in cash to put down on a $200,000 house, which can be a tough nut to crack for some borrowers. However, FHA loans come with a handy twist: You can receive your down payment as a gift – say, from parents or a rich uncle – and still qualify for the loan. Your benefactor should be prepared to document the source of funds.

The Federal Housing Administration imposes limits on the loan amount, which vary according to the property’s location. You can check the HUD website to find the FHA loan limit for your area.

The federal government has long allowed state governments and private charities to provide down payment assistance to those who need it. In each case, you may be able to get some or all of your 3.5 percent down payment offset via one of these programs. Your mortgage representative or real estate agent may have more information on programs available in your area.

One insider tip: In both cases – VA loans and FHA loans – you will still have to come up with closing costs, which are frequently 3 or 4 percent of the loan on the buyer’s side. The FHA, however, stipulates which closing costs the buyer can pay and seller must pay the rest. One idea that Snyder, a U.S. Navy veteran, used when buying her own home, is to ask for a 4 percent sellers’ concession. In a buyer’s market, the seller may agree to get the deal to happen. “I got money back at the closing,” says Snyder.

Down Payments for Conventional Loans

A conventional loan, in a nutshell, is any mortgage that doesn’t come with a federal guarantee. We’re back to the 5 percent to 20 percent down payment these days on conventional loans. Specifics vary with the lender and by location, as well as by whether the loan is “conforming,” that is, within the underwriting standards established by Fannie Mae and Freddie Mac, the major mortgage buyers upstream from the lender. As Snyder mentioned, many lenders aren’t buying the piggyback loan solution anymore – conventional borrowers will actually have to pony up real money.

There are advantages to putting more money down: If you can reach the 20 percent threshold, you won’t need to pay PMI. Plus, more home equity helps your credit score, counts as an asset on your balance sheet that you can actually borrow against (if you can qualify when you actually need the money!), and puts you in a better position to rent the property on a cash-flow positive basis if things don’t break your way in the future.

What About Down Payments for Investment Properties?

If the home is not your primary residence or a second home, then you can expect to have to come up with more – at least 20 percent, in most cases, depending on the nature of the property. Lenders require the higher down payment because mortgage insurance typically only covers primary residences. For the best interest rates, think closer to 25 percent or more – plus reserves against the possibility of vacancy.

If you want to hold your property in an IRA, then you will need to come up with at least 35 percent down, plus reserves, advises James Hitt, an advisor in Asheville, North Carolina whose company, American IRA, LLC, specializes in real estate and other nontraditional holdings in retirement accounts. “The less you put down, the greater the risk,” cautions Hitt.

{ 21 comments… read them below or add one }

lstruck October 6, 2014 at 5:26 pm

I am purchasing property for use as rental property and paying all cash. What percent is required for a down payment?

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Crystal Sorah July 31, 2014 at 4:28 pm

I need help of getting a loan for a house, This would be my first time trying to get a loan for a house, I am in Chirstiansburg va

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Carla Dauch June 28, 2014 at 8:36 am

Hello,
We are second time home buyers and we were wondering if we are able to get a loan for a house that cost a little over 2000.?

Thank you,
Carla Dauch

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mandy Brady June 18, 2014 at 4:37 pm

Hi,
I was wanting to buy a $$150,000 house and I was wondering what kind of loan I needed to go with. It will be our primary residence. Also I am a first time home buyer so I don’t really know how much I need to save for the down payment and closing costs. If you could please get back to me soon that would be great. Thank you

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laveda heard February 20, 2014 at 4:50 pm

hello how are you my name is the laveda , and I’m writing to find out if I owned a home how would I go about getting a loan on it thank you

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Amanda January 29, 2014 at 5:40 pm

Hello,
I have read that for an FHA loan you have to work in the area you are buying a home however I work in California (have worked there for 3 years) and just relocated to Colorado. Is there anyway around this? Also, if I were to keep my job in California and get a per diem job in Colorado would that suffice for employment (working one day a week in Colorado)?
Thanks!

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Noemi Messerly November 15, 2013 at 3:58 pm

My husband and I would like to become first time buyers within 4 months. We tried once before 2yrs ago with no luck. We want to do it the right way this time. Can you please contact me.

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lorie October 21, 2013 at 11:48 am

My husband and I have a house and we are currently paying on, but we want to buy another house for our family to live in and rent the current house out. What would we need to make this happen?

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Steve August 14, 2013 at 2:05 pm

I would like to buy a rental property (single family home). Here’s the situation.
Divorcing couple – current mortgage of $135k on a $195K (appraised) home. Mortgage is under his name and he’s leaving. The wife cannot get a loan. What would a bank require down considering about $60k in equity for a investment property?

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Randy Yates July 27, 2013 at 11:46 pm

FHA allows lenders to go down to a 580 mid credit score to fund an FHA loan. I know of several lenders that can get you approved with low scores.

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Umberto Carrera August 18, 2013 at 6:14 pm

I would like to buy a rental shore house. The problem is I have no credit but I work for the government (post office). I have a wife and 3 kids. What loan do u think I should go for or which 1 do u think i could get?

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Joanne August 22, 2013 at 6:31 am

Umberto, you can not get an FHA loan for a shore house. It has to be your PRIMARY residence.

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Silvia Gonzalez October 1, 2013 at 9:36 pm

Randy Yates,
Hi what lenders can get you approved with low scores?

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Charles June 7, 2013 at 11:31 am

For those who can not qualify for USDA Rural Development or FHA, you should consider a hybrid loan or lease option with the owner. Chances are you will get favorable terms with a healthy down payment.

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Ken Austin May 14, 2013 at 1:54 pm

I’ve already made two seperate purchases in the last couple of years…one using an FHA loan, and the other with my VA loan. I’m looking to make another purchase for a single family home that will be owner occupied. Any idea about what percentage I should expect to have to drop for a down payment? Also, am I stuck going conventional?

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Mario Navarro January 26, 2013 at 2:32 pm

I can’t seem to get approved for a loan with 7,000 down payment and a credit score of 610. Is there anything I should do?

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Julia August 12, 2013 at 7:39 am

Try a local credit union. They lend their own money and can be a lot more flexible than a conventional lender.

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Michael green January 16, 2013 at 8:27 am

I am interested in buying a home but was wondering how much do I have to show in my accounts? I make more than enough but, due to the fact I just finished clearing up my credit, my accounts won’t have a lot in it. After this process and the past 6 months, they won’t show high balances. My phone number is 267 679 3361. Thank you.

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Jason Van Steenwyk January 16, 2013 at 3:07 pm

Hello, Michael! Thanks for writing!

I got an email alert with your comment and I went to look for this very article, only to find out that you had already commented on it.

Are you asking how much ‘reserve’ you might need to show a lender over and above your down payment, then?

Also, what kind of mortgage are you looking at? Are you a veteran? Planning on going FHA? Something else?

Thanks,

Jason

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carlos December 1, 2012 at 12:44 am

Hi I’m interested into buying a home and would like some more information

Reply

Esavia aitkens November 12, 2012 at 9:45 am

I would like to know more about the no down payment on buying a home, I can be reach at the about number 267-666-0949

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