How Much Should Buyers Put Down On A House?

By ERIN FLYNN JAY

If you are looking for a home and don’t have 20% to put down, you are not alone.

According to the National Association of Realtors, the typical down payment for first-time buyers is 8%. For repeat buyers, it’s 19%.

And for 38% of first-time buyers, saving for a down payment was the most difficult step in the process.

Sean Moss, EVP of product and operations at Down Payment Resource, says there is no one right answer to the question of how much money to put down when purchasing a home. It’s dependent on the buyer’s financial situation, as well as the loan type they plan to use.

“It’s a common misconception that 20% down is the standard or required,” Moss said. “For example, many renters spend prolonged periods saving 20% down to bypass Private Mortgage Insurance, but they may end up wasting more money renting than they would save on PMI or interest savings.”

Buyers determining how much to put down need to balance income, debt, qualifying ratios, the house they need, and the payment they are comfortable with.

Low- and zero-down mortgages can be excellent options for qualified homebuyers, Moss said.

“FHA loans require as little as 3.5% down, and conventional loans require as little as 3% or 5% down,” said Moss. “VA loans require as little as 0% down, making them especially attractive to veterans. Similarly, USDA loans will finance properties in rural areas for as little as 0% down.”

Down Payment Resource connects buyers with down payment assistance programs that can help them with financing but may require participation in a homebuyer education course.

“These courses offer a wealth of knowledge on the home buying process and ongoing homeownership responsibilities,” said Moss. “Completing a course early in your homebuying journey ensures you’re not only prepared but also eligible for various assistance programs. The certificate of completion typically remains valid for one year.”

What other factors need to be considered?

In addition to the down payment, closing costs are another upfront expense of homeownership, and they can be substantial.

“Sellers can agree to contribute towards closing costs as part of the purchase agreement, but their willingness to do so often depends on the market,” said Moss. “Many down payment assistance programs allow funds to be used toward closing costs. If a borrower can use DPA to cover closing costs, they may be able to make a more competitive offer with additional liquid cash on hand.”

Beyond the purchase price and immediate expenses, prospective homeowners should prepare for the ongoing costs of homeownership. These include routine maintenance, emergency repairs, property taxes, and homeowner’s insurance, among other things.

Moss said it’s important for buyers to do their research.

Not all loan officers and their offerings are alike, so Moss advises people to collect as much information as they can.

“It’s advisable to compare services from at least two or more loan officers to determine who provides the most favorable terms and products tailored to your specific needs,” said Moss. “The right loan officer should offer competitive rates and a willingness to explain and guide you through the options available.”

Once buyer have selected a loan officer, they should have an in-depth conversation about mortgage options and the nuances of different down payment strategies. Moss said this discussion should cover loan types, interest rates, and homebuyer assistance programs.

Aren’t cash offers and conventional loans preferred by sellers?

Patrick Clouden, mortgage consultant with Hunt Mortgage in Buffalo, NY, said cash and conventional buyers are viewed as stronger buyers than those with government financing. Clouden would not say they get preferential treatment from sellers, but their offers are viewed as stronger offers by sellers simply because the truth of the matter is, they are.

Government-backed financing – FHA, VA, and USDA loans – have a stricter appraisal process than conventional loans do, “and of course cash buyers are not required to have a bank appraisal at all,” he said.

From the seller’s standpoint, if they have two competing offers, both at the same price point for their home, but one is cash and one is FHA or even conventional financing, Clouden said they are going to accept the cash offer. This is because there is no chance of the financing falling through due to an appraisal issue or any of the other potential issues that can arise between accepting the offer and closing.

“Similarly, if you have two competing offers both with financing, but one is with a government loan and the other is a conventional loan, it makes more sense to take the conventional offer from the seller’s standpoint because there is a smaller probability of the financing falling apart and the deal falling through due to an appraisal issue,” concluded Clouden.

Dianne Michlinski, licensed associate real estate broker with Hunt Real Estate in Buffalo, NY, agrees that cash offers are typically favored.

“There aren’t any finance contingencies, appraisal contingencies and you can close quickly,” Michlinski said. “This is generally a preferred offer.”

But that isn’t always the case. The purchase price is usually the most important thing to a seller, she said.

“The homeowner will not always go for a conventional or cash offer,” said Michlinski. “They will look at all the terms before making a decision. If they see a VA or FHA loan with a higher purchase price, they might go that route depending on their personal situation. Every sale and homeowner is different. We don’t have a one-size-fits-all for real estate.”