How Much Downpayment for First Time Home Buyer?
Down payments for a house vary from buyer to buyer, house to house and between mortgage loan options. A lot of factors go into the down payment amount. Add to that your closing costs, and the answer to "How much downpayment for first time home buyer?" is way too broad for a single amount. However, we can help you plan - and decide on a route you want to take to buy that first house.
The question likely aims to answer a more broad problem: how much cash do I need for my first home? To get to the bottom of this, let's start with the down payment. Depending on the mortgage option you choose, you might buy a house with no down payment, 3%, 3.5%, 5% or more. Here are a few option.
Zero Down Payment
USDA Rural Development and VA Loans both offer buyers a chance to avoid a down payment. You'll still need cash-to-close (like escrow funds), but the mortgage loan funds the purchase price of the house itself. With rural development, you'll need to find a home that fits into certain geographical parameters. But don't let the name fool you. Rural actually covers many small towns and areas near bigger cities. As the name suggests, you must be a military veteran if you want to qualify for a VA loan.
Low Down Payment
HomePath Mortgage* is an option for the first time home buyer willing to consider a Fannie Mae-owned property. These houses are foreclosed homes, so they're often priced below market value. You can find good deals, and Fannie Mae requires a minimum 3% down payment. This means a house selling for $40,000 would require you to have just $1200 for the down payment.
If the house has sat for awhile and needs some TLC, HomePath Renovation might be an option. This allows you to finance repairs, renovations and home improvements into the loan. This requires a 5% down payment.
FHA loans are the next step on the down payment sliding scale. You'll need 3.5% of the purchase price for an FHA loan called the 203b. That's the usual mortgage loan people talk about when going with FHA. So for a home priced at $70,000 you would need just shy of $2500 for the down payment. Take into account though: you'll also need closing costs. Some of this money will go towards things like funding your escrow - which will pay your property taxes and homeowners insurance. These funds can add up to another couple-thousand dollars (just a general estimate - talk to a mortgage consultant for a more accurate estimate).
With FHA, a first time home buyer can also find a home improvement loan to buy a fixer upper and pay for the work. The FHA 203k allows home buyers to fund repairs and upgrades directly into one mortgage payment. It's not a second mortgage or home equity line of credit - it's one entire mortgage. Learn more here: What is the FHA 203k?
From here on out, down payments will vary depending on how you want to structure your loan. With 5% down you may be able to get into a conventional mortgage loan, but you'll need monthly mortgage insurance. If you can afford 20% down you can avoid mortgage insurance. A bigger down payment can often help lower the interest rate on your mortgage loan, too.
What Do I Do?
Some loan options like FHA allow the borrower to finance a down payment with a gift from a family member. You can even use a wedding registry where your guests can contribute to your FHA loan down payment. Other programs (often local or state level) offer grants for down payments. Contact your local or state housing authority for information on grants and other programs to help fund your down payment.
If you're looking to become a first time home buyer, download our free kit. Click the button below for our eBook to help you get started on buying that first house. It's about 30 pages long (including several pages breaking down real estate and mortgage terms for you) and covers everything from credit to loan options and more.
(creative commons photo credit)
*HomePath is technically a conventional mortgage. So it should be pointed out that it is the only option when one wants a conventional loan and no mortgage insurance along with a down payment less than 20%.