Average Down Payment on a House for First Time Buyer Today

When buying a house, having enough cash for the down payment is crucial. Saving for a down payment can be tough, especially for first-time buyers. But there is good news – the standard minimums for various mortgages are lower than you think. Putting down 20 percent on a home isn’t mandatory; the minimum required for a house can be significantly lower. This blog will help you know the average down payment on a house for first time buyer. It will also explore the typical requirements for different loan types. The goal is to help you understand what expenses to anticipate as you progress toward homeownership.

If affording the down payment seems daunting, you might qualify for down payment assistance programs. These programs alleviate the financial burden for many homebuyers, covering not only the down payment but also assisting with closing costs, such as appraisal fees, loan origination fees, and homeowners insurance. We will talk about all of these, here.

What is the average down payment on a house for first time buyer?

Remember, there’s no one-size-fits-all answer regarding the ideal down payment for buying a house. Various factors determine how much to put down on a new home. These include the mortgage loan type, the price of the house, market conditions, and the buyer’s financial situation – which is reflected in their debt load (credit card debt, student loans, and auto loans) and savings.

Other factors such as the home’s condition, the potential home repair costs, and the buyer’s age also affect the median down payment.

Data from the National Association of REALTORS® in late 2022 indicates that first-time buyers typically put down around 6% to 8% of the home price, while repeat buyers put down approximately 17%. With the median home sale price in the U.S. at $416,100 as of mid-2023, this means a down payment of 6% to 17% would range from roughly $25,000 to $71,000. However, your specific down payment may differ from these averages depending on your financial situation and loan choices.

What are the factors to consider before making a down payment?

While a larger down payment can lead to a reduced interest rate, it also restricts available funds for other homebuying expenses. Conversely, opting for a smaller down payment accelerates homeownership but entails higher monthly mortgage payments and additional expenses such as private mortgage insurance (PMI).

It’s crucial to maintain an emergency cushion. Keep in mind that you’ll need money for closing costs, as well as expenses such as buying home furniture, moving, and any home repairs.

What is the significance of a 20% down payment?

A common misconception among first-time homebuyers is that they need to put down 20 percent to be eligible for a home mortgage. Fortunately, this is not true. The idea of needing a 20% down payment stems from the requirement for PMI – an insurance that conventional loan lenders often demand to protect themselves if a borrower defaults on their home loan. Typically, if your down payment is less than 20%, most lenders will ask you to pay for PMI. Once you’ve amassed enough equity, you can request your servicer to eliminate your mortgage insurance.

Therefore, opting for a 20 percent down payment can help you steer clear of mortgage insurance and potentially secure a lower interest rate. It leads to considerable savings.

Why do homebuyers prefer a smaller down payment?

The average down payment for a first-time homebuyer is typically below 20 percent not only because it’s challenging to save enough money, but also because people want to keep more funds available for other expenses and cash reserves. Closing costs cover various expenses related to processing your loan, including origination, appraisal, and title fees, typically ranging from 2 to 5 percent of the home’s purchase price.

While not every borrower needs cash reserves, it’s prudent to have savings set aside in case you’re unable to pay your mortgage. Depending on your lender’s requirements, you may need anywhere from one month to six months’ worth of mortgage payments saved up.

How does the down payment on a house depend on the loan type?

It’s important to understand that the minimum down payment required is different for different types of home loans besides the home’s price. These minimums represent the least amount you’ll need to come up with to purchase a home.

Adjustable-rate mortgage (ARM)

An ARM offers a lower fixed interest rate for a set period and then adjusts based on market conditions. Typically, these loans require a minimum down payment of at least 5%. However, specifics may vary based on factors such as home price, credit score, and income.

Jumbo loan

A jumbo loan exceeds conforming loan limits. And they typically require a minimum down payment of 10% or more.

Conventional mortgage

Conventional mortgages are backed solely by the financial institution originating the loan. These mortgages typically require a higher credit score and a larger down payment (anywhere from 3% to 20%) compared to government-backed loans. That’s why they are more suitable for borrowers with strong credit histories and stable financial situations. They offer a variety of terms and options, including fixed-rate mortgages and adjustable-rate mortgages, conforming and non-conforming mortgages.

FHA loan

Backed by the Federal Housing Administration (FHA), these loans usually require a minimum down payment of 3.5%, potentially rising to 10% for those with lower credit scores. They offer competitive rates and terms for primary residences.

VA loan

Available for eligible military members and veterans by the Department of Veterans Affairs, VA loans generally have no required down payment, low closing costs, and favorable rates for primary residences.

USDA loan

This loan type is specially designed for homes classified as “rural” by the USDA. The loan requires no down payment and offers competitive rates. However, the eligibility hinges on household income not exceeding 115% of the median income.

What are the advantages of making a smaller down payment?

Making a smaller down payment offers several advantages. Firstly, it allows you to become a homeowner sooner, enabling you to start building equity and move into your own home earlier than if you were to wait until you’ve saved a larger sum.

Additionally, opting for a smaller down payment means you can purchase a home without having to wait years to accumulate enough savings. This flexibility is particularly beneficial when you need to move quickly.

Moreover, by keeping more money in your pocket upfront, you have additional funds available to cover various homeownership expenses such as house repairs, renovations, and furnishing your new residence.

Furthermore, making a smaller down payment can help you avoid potential increases in home prices and interest rates that may occur while you’re saving for a down payment that’s large.

Lastly, maintaining a healthy emergency fund is essential. By opting for a smaller down payment, you can ensure you retain enough savings to cover unexpected costs, providing you with financial security and peace of mind.

What are the drawbacks of a smaller down payment?

Many conventional loan programs require this type of insurance if the homebuyer puts down less than 20 percent. This additional expense can add up to $30 to $70 for every $100,000 borrowed per month, as reported by Freddie Mac.

With a smaller down payment, you start with less equity in the home. This can become problematic if property values decline. It can potentially leave you owing more on your mortgage than your home is worth.

Additionally, having less equity means it will take longer before you can access funds by borrowing against your home’s equity.

Furthermore, a smaller down payment results in a higher loan-to-value ratio (LTV), making your mortgage riskier for the lender. It may lead to a higher interest rate for you. Consequently, your monthly payments will be larger due to the higher loan balance. This can increase your financial strain.

Is a large down payment a better idea?

A larger down payment often results in paying less interest over time and helps a buyer avoid paying PMI fees (if the down payment is at least 20% of the purchase price).

However, it’s crucial to assess your financial situation before deciding. Delaying your purchase until you have accumulated sufficient savings for a substantial down payment may result in increased expenses. For instance, you might pay higher rent while waiting to save. It may potentially outweigh the benefits of eliminating PMI and reducing interest payments.

Additionally, in a competitive housing market, delaying your purchase could cause you to miss out on favorable opportunities.

Are there any government programs that help with down payments?

Not being able to afford the average down payment can result in challenges in securing a mortgage, potentially higher monthly payments, and limited options for homebuyers. It’s essential to explore alternative financing options and assistance programs if needed.

Down payment assistance programs help cover your down payment or closing costs. It means you don’t have to pay for everything on your own. These programs are provided by state or local governments and nonprofit organizations. Here are some of them.

Grants are gifts that help pay for your down payment and closing costs. And, you don’t need to repay them.
Forgivable loans act as a second mortgage for a set number of years, typically with no interest. You only need to repay this loan if you move, sell, or refinance before a certain time.
Deferred payment loans are second mortgages with either no interest or low interest. However, you must repay the loan once you relocate, sell the property, or secure new financing.

To see if you qualify for down payment assistance, you can ask your mortgage lender about the programs they accept and whether you meet the requirements or not.

What is the best way to reduce your down payment?

Saving for a down payment can feel daunting due to its significant cost. Here are some tips to help you gather the funds needed to purchase a house:

Determine your down payment amount and monthly payments before applying for the loan.
Buy a less expensive home.
Try to qualify for a lower mortgage rate. It can reduce your down payment and monthly loan payments.
Compare mortgage types to find the most affordable choice. For instance, government-backed programs such as FHA, VA, or USDA loans may require 0% to 10% down.
Aim for a low debt-to-income (DTI) ratio to qualify for more loan programs and competitive rates.
Set up automatic transfers from your paycheck to a savings account to avoid overspending and reach your down payment goal sooner.
Consider gift funds from family members. Be aware of mortgage gift rules and any requirements for using personal funds alongside gift funds.

Key takeaway

The average down payment for buying a house varies, typically around 6% for first-time home buyers and 17% for repeat buyers. This upfront cost is significant as it marks a major expense for homebuyers looking to secure a mortgage.

Factors influencing the average down payment on a house for first-time buyers include the buyer’s financial situation, type of mortgage, home price, and market conditions. While some lenders may negotiate down payment amounts, eligibility depends on lender policies and the borrower’s financial situation. Making a larger down payment than the average can lead to benefits such as lower monthly mortgage payments, reduced interest rates, and avoiding PMI premiums.

FAQs

What happens if I’m unable to meet the minimum down payment requirement?

You could consider buying in a USDA loan-eligible area, where no down payment is needed. Alternatively, you might ask friends or family for a gift to help cover costs. Keep in mind that you’ll need to provide a gift letter to your lender. The safest option is to save money until you can afford the minimum down payment.

How can I make a down payment?

The most common methods of securing a down payment include saving money, receiving a gift from family or friends, or getting assistance through a grant or other programs. Some buyers may also take on additional jobs, withdraw from retirement accounts, or sell cryptocurrency. Remember that it’s important to have funds in your bank account for at least two months before applying for a mortgage. Otherwise, you may need to provide additional documentation to prove the source of the money.

How does my credit score affect the minimum down payment amount?

It varies depending on the loan program. For instance, with a VA loan, your credit score doesn’t impact the down payment since there’s no down payment requirement. However, with an FHA loan, a better credit score allows you to put down less.

How does the down payment affect the interest rate on my mortgage?

A larger down payment typically leads to a lower interest rate. This is because a bigger down payment results in a smaller loan-to-value ratio, reducing risk for the lender and enabling them to offer you more affordable financing.

Can I use assets other than cash for the down payment?

Technically, you can use assets such as stocks or land you own as collateral to reduce the need for cash. However, this can be harder to get loan approval for. The reason is that financial assets carry higher investment risk. And, some loan lenders may still require cash regardless.

What’s average down payment on a house for first time buyer was last modified: December 4th, 2024 by Ramona Sinha

Written by Ramona Sinha. May 4, 2024

Ramona is the Senior Content Writer for Kukun. This experienced blogger uses simple and succinct words to decipher the complex phenomenon called life. She has written articles covering a broad range of topics, such as real estate, lending and mortgage, finance, business, taxation, home designs, home improvement projects, decor concepts, and more. An avid traveler, she’s a digital nomad at heart and an animal lover from the depth of her soul.