There are some ways to buy a house with no -- or very little -- money down. However, making a bigger down payment can make a big difference in the terms you receive for your mortgage and the kind of house you can buy. Your lender will look at how much you plan to pay upfront to determine how much you can afford to pay each month based on your income and your overall debt load. Read on for a deep dive into what a down payment is, how much is required to make a down payment and where you might be able to find some assistance with coming up with the cash.
What is a down payment and how is it calculated?
A down payment is the amount of money you can contribute upfront to a home purchase while borrowing the remainder from a lender. A down payment is typically expressed as a percentage of the home price. So, for example, if you plan to put down $30,000 on a home that costs $300,000, you’re making a down payment of 10% of the home’s price.
When applying for a mortgage, a lender will ask you for an estimate of how much you can afford to put down. Lenders prefer to see a larger down payment because it demonstrates how responsible you are financially: You’re willing to save more money to use it to pay for your new home and avoid taking out a larger mortgage, which in turn helps increase the lender’s confidence in your overall financial well-being.
What are the minimum down payment requirements?
Down payment requirements vary based on the type of loan you’re looking for and your credit score. For example, consider these common down payment percentages:
0%: USDA and VA loans don’t require a down payment.
3%: If you have good to exceptional credit, and qualify for a conventional loan, many lenders will approve your mortgage application with a down payment of just 3% of the purchase price.
3.5%: An FHA loan requires a slightly higher minimum down payment for borrowers with credit scores of 580 and higher.
10%: If you have subpar credit -- 500 to 579 -- you may still be able to qualify for an FHA loan, but borrowers with such poor credit scores need to contribute 10% of the home’s purchase price.
Another common type of loan -- a jumbo loan -- also often requires a 10% down payment because the loan exceeds conforming loan limits; essentially, these are bigger chunks of cash, so lenders often like to see a larger down payment.
What are the income requirements for making a down payment on a mortgage?
When a lender is evaluating how much you can afford to spend, it all starts with how much you earn -- and how much you’re already spending to pay back other loans. This is known as your debt-to-income ratio, which is simply how much money you must pay every month compared to how much money you earn each month. In most cases, lenders prefer to see a DTI of 36% or less, but there are some loan programs that allow up to 50% DTI.
Simply put, if you make a larger down payment, you’ll be borrowing less money, which means you’ll be keeping your DTI lower.
How to calculate your DTI
To figure out your DTI, add up all your monthly debt payments, including your monthly mortgage payment, and divide it by your total monthly earnings. For example, consider how the below monthly debt obligations stack up against a $120,000 annual salary.
- Student loan payment: $200
- Car payment: $500
- Monthly mortgage payment: $2,600
The total debt load per month adds up to $3,300, while the total earnings per month are $10,000. The DTI is 33%.
Now let’s consider the same debt load for someone who earns $100,000 per year. Divide the monthly income -- $8,333 -- by $3,300, and the DTI is over 39%.
The 20% down payment rule
You may have heard of the 20% down payment rule and assumed that you need 20% of the purchase price in order to become a homeowner. This isn’t the case. Instead, 20% is simply an ideal figure in the lender’s eye because it means you’re putting more money in the deal. Borrowers who do make a down payment of 20% are able to avoid paying for private mortgage insurance, or PMI -- a premium that lenders typically add for smaller down payment arrangements to compensate for the higher risk of default.
What are the income requirements for various types of mortgages?
There are no set income requirements for different types of mortgages. For example, no lender is going to say, “You need to earn X-amount of money to apply for this kind of loan.” There are, however, DTI requirements that you will need to consider.
Conventional loan: To conform to Fannie Mae and Freddie Mac standards, a 36% DTI is ideal. However, you might be able to be approved with a DTI of 45% with a higher credit score and/or a bigger down payment.
FHA loan: An FHA loan allows for a DTI of up to 50%.
VA loan: Lenders that offer VA loans ideally look for a DTI that doesn’t exceed 41%.
USDA loan: USDA loans have a maximum DTI of 41%.
What other factors determine your mortgage?
Your DTI isn’t the only piece of the puzzle that your lender will evaluate. Your credit score plays a critical role in determining if you’ll be approved for a mortgage and your interest rate. For conventional loans backed by Fannie Mae or Freddie Mac, you’ll need a minimum credit score of 620, while FHA loans will accept credit scores for as low as 500. VA and USDA loans don’t have set minimum credit score requirements. Additionally, your credit score will impact what rate you can secure: The higher your credit score, the lower your rate. Individual lenders usually offer the lowest mortgage rates to borrowers with credit scores of 740 and above.
Your down payment is essential, too, and ultimately, that upfront contribution will influence your DTI. For example, if you make a $50,000 down payment on a $500,000 home, your monthly payment for principal and interest on a 30-year loan with a 7% interest rate will be $2,993. If you can only afford a $25,000 down payment, that monthly cost jumps to $3,160, thereby increasing your DTI.
Down payment assistance
If you’re scratching your head trying to figure out how you’ll come up with the money for a down payment, don’t be discouraged: There are numerous options for down payment assistance, especially for first-time and low- to moderate-income buyers. In many cases, these options can also be used to cover your closing costs.
- Grants: This is the ideal form of assistance, as a grant is outright free money with no obligation to pay the money back.
- Forgivable loans: As the name suggests, these loans will eventually be wiped away, provided that you live in the home for a certain amount of time. If you wind up moving before that period is over, though, you’ll have to pay a portion of the money back.
- Deferred loans: These loans are typically 0% interest loans that will be due at the end of your mortgage or if you sell or refinance your mortgage.
- Low-interest loans: Some down payment assistance loans do charge additional interest, and you’ll pay the loan back at the same time as your primary mortgage payment. These are helpful because you don’t have to come up with all the cash for a one-time payment, but they’ll impact your monthly budget.
How to qualify for down payment assistance
The qualifications for down payment assistance programs vary based on where you’re trying to buy, but in general, you’ll likely need to meet the income and purchase price limits set in place by the local or state housing authority.
Additionally, you may be required to complete a homebuyer education course. These are classes that are helpful educational tools to know the basics of home ownership and your financial responsibilities.
What mortgages can you use with down payment assistance?
You can pair a form of down payment assistance with most mortgages, including conventional loans and FHA loans. It’s important to understand the assistance is separate from the loan. For example, you can apply for an FHA loan while looking for supplemental down payment assistance to help cover the 3.5% down payment requirement. VA loans and USDA loans don’t require a down payment, so technically your down payment assistance is simply included in the cost of the loan.
VA loan down payment
In most cases, you don’t need to put any money down if you qualify for a VA loan unless the property appraisal comes back lower than the price you agreed to pay. However, there is a reason to consider going above and beyond to make a down payment: You can reduce the cost of your VA funding fee. For most first-time buyers, the fee is currently 2.15% of the purchase price. However, the VA funding fee will be lower if you can make a down payment. For example, if you make a down payment of 10% or more, the fee is reduced to 1.25% of the purchase price. On a $300,000 home, that’s a difference between a standard fee of $6,450 and a lower fee of $3,750.
Where to apply for down payment assistance
The best place to look for down payment assistance is with your state or local housing authority. Start by reviewing a directory of all state housing authorities from the Department of Housing and Urban Development.
The government isn’t the only place to look. There are many banks and credit unions that offer down payment assistance programs. For example, Bank of America offers two types of grants -- between $7,500 and $10,000 -- that can be used to cover closing costs, down payment expenses or the chance to buy down an interest rate.
If you’re not sure of what you might be able to qualify for, use downpaymentresource.com, which includes a comprehensive directory of options available by area.
What types of income satisfy paying a mortgage?
When applying for a mortgage, your lender will ask you for proof of all your forms of income to see how much money is coming into your bank account on a regular basis. The most common forms of income are from employment -- wages from your regular job, bonus and commission earnings and any self-employed income you generate from working as a freelancer or independent contractor (be prepared for a more thorough mortgage application process if you’re fully self-employed).
However, there are other types of income that you can show to your lender to help you prove you have enough money to cover your payments:
- Interest income from savings accounts, CDs, stocks and other investments
- Alimony or child support payments
- Your Schedule K-1 (Form 1065), which includes money generated from businesses like partnerships and corporations, of which you are an owner
- Social Security payments
- Income from a trust account
- Mortgage credit certificates. If you qualify for a mortgage credit, lenders can treat this as income to lower your DTI.
The bottom line
While you might be focused on how much you need for a down payment to qualify for a mortgage, it’s important to understand that a lender is going to take a holistic look at your finances to figure out how much you can reasonably afford to pay back each month. They’ll also look at your income, your other debts and your credit score.
FAQs
If you have very good to excellent credit, with a FICO score of at least 740, you may be able to qualify for a conventional loan that requires a down payment of 3% of the purchase price. However, your down payment isn’t the only piece of the homebuying puzzle: You also need to budget for closing costs, which can add thousands of dollars to your upfront expenses.
Scrutinize your budget to find every opportunity to cut your non-essential costs. For example, look at how much you might be able to save by reducing dining out and entertainment. Also, consider selling assets you don’t need such as vehicles, artwork or jewelry. Then, take all that extra money and stash it in a high-yield savings account so that you can earn interest to get closer to your down payment goal. Another way to save: Consider moving in with family or friends temporarily. That might not be a comfortable option, but it can help accelerate your savings by eliminating your monthly housing payments, if for a while.
No. A 20% down payment on a house will eliminate the need for paying private mortgage insurance. If you’re okay with paying PMI, you can make a significantly smaller down payment to become a homeowner. In fact, according to the National Association of Realtors, first-time homebuyers typically put down just 7% of the purchase price.
