Bison State Bank’s Guide to Home Loan Down Payment Affordability

Average down payment on a house

Owning a home is a dream for many people, but it’s often seen as an unachievable goal. Of all the reasons that’s the case, affording a down payment and closing costs is often the largest perceived barrier. 

Studies show that more than 2/3rds of renters surveyed indicate affording an average down payment on a house was a barrier to home ownership, and those numbers are even higher for minorities. 

At Bison State Bank, we’re committed to helping everyone achieve their home ownership dreams. We have the knowledge and expertise to set you on the path towards a better future, and our friendly loan officers understand how to customize your loan to fit your needs.

When it comes to your down payment, there are more options available than you may think, including some that dramatically increase your required funding up front. Keep reading to learn more about home loan down payments, or get in contact with our loan officers and receive personalized advice for your specific financial situation. 

What exactly is a down payment?

Simply put, your down payment is the money required up front for a large transaction, such as a home or car loan. The down payment comes from your personal funds, so it’s essentially what you can afford to put on the house before your mortgage loan covers the rest. 

Traditionally in the past, a conventional home loan down payment required a 20% down payment to avoid mortgage insurance. If you have the means to put 20% down up front, then by all means do so and avoid the mortgage insurance. But for many potential homeowners—particularly first-time homeowners with no pre-built equity—saving up for a 20% down payment is a daunting task. 

Related: How equity works for you

Fortunately, contrary to popular belief, you don’t have to put 20% down to purchase a home! In fact, the average down payment on a house for homebuyers age 22-40 is less than 10%, and the overall average is 12%. 

You can actually get a conventional home loan for as little as 3% down if you’re a first-time home buyer. And, in certain circumstances, there are loan options where you won’t owe any down payment at all! Below is a rundown of the different mortgage loan types and their associated down payments. 

Conventional mortgage loans

A conventional home loan is the most popular option for prospective borrowers. These loans have a “fixed” interest rate that doesn’t change for the life of the loan, and they come in different loan lengths like 15, 20, or 30 years. 

The longer the loan length, the less your monthly payment and the more flexibility the borrower has to increase monthly payments over their loan lifetime. Conventional loans are available for as little as a 3% down, and these loans typically boast a low average down payment on a house. However, conventional home loans with less than 20% down do require private mortgage insurance (PMI)

Private Mortgage Insurance

For borrowers on a conventional loan, PMI is usually required when you make a down payment of less than 20% of the purchasing price. This is typically added to your monthly payment, and after you have built up a 20% equity in your home your PMI is typically canceled.

PMI is a safety net for lenders because it protects them from borrowers who stop making payments on their loan. It’s arranged by the lender and provided by a private insurance company. While it’s mainly aimed at protecting lenders, PMI also helps borrowers afford loans they might not have been able to otherwise. 

Related: More on mortgage insurance

FHA loans

An FHA loan is a mortgage backed by the Federal Housing Administration to help make homeownership possible for borrowers who don’t have the means for a large down payment or excellent credit.

These are for potential homeowners with financial difficulties. It gives your lending agency flexibility in underwriting standards, so borrowers who might not qualify for other mortgages have a higher chance of becoming homeowners. FHA loans do require mortgage insurance, however, which protects the lender from a loss if the borrower defaults.

Per FHA rules, a loan can go down to a 500 credit score with a 10% down payment. However, borrowers can qualify for an FHA loan with a minimum of 3.5% down payment if they have a 580 credit score or above. 

Most mortgage companies focus on FHA loans at a 620 and above credit score. As stated, FHA does have mortgage insurance each month and can be reduced if 5% or 10% is put down on the loan.

Related: Our guide to the different types of mortgage loans

VA Benefits

Where conventional and FHA loans still require at least a 3% down payment and overall have a low average down payment on a house, veterans of the United States military have the option for no down payment whatsoever. 

Mortgages through the VA home loan program are one of the major benefits our country provides for veterans. They include no required down payments, lower interest rates, no private mortgage insurance, and limited closing costs. 

The VA limits an origination fee to 1% of the loan amount and has specified costs that the Veteran cannot pay. These are called VA allowable and non-allowable fees. The settlement fee, doc prep fees, rate lock-in fees, escrow fees (and more) can only be charged if they are included in the 1% origination fee.

All uniformed service members are eligible for VA home loan benefits, including members of the Army, Navy, Air Force, Marines, Coast Guard, Space Force, National Oceanic Atmospheric Administration (NOAA), the Army Reserve, and Public Health Service. There are restrictions based on time of service, which also varies based on your branch of service.

For example: National Guard members and reservists are eligible for a VA home loan if they have completed at least six years of honorable service, are mobilized for active duty service for a period of at least 90 days, or are discharged because of a service-connected disability. Learn more about restrictions and requirements for VA home loan eligibility on the VA website.

We are dedicated to client satisfaction across the board, and part of that dedication means actually listening to our clients’ needs. This is especially important when it comes to VA loans. You sacrificed your time and put your life on the line to help keep this country safe, so the least we can do is help put you in the home of your dreams when you return to civilian life.

Related: More about VA home loans

USDA loans

Depending on where your home search takes you, a USDA home loan may be an option. USDA home loans are zero down payment mortgages that are eligible for people in rural areas.

These loans are issued by the United States Department of Agriculture to encourage rural development and “improve the economy and quality of life in rural America.” The not only require no down payment, USDA home loans feature a number of other benefits such as:

  • Loan guarantees similar to FHA and VA loans
  • Low interest rates
  • Closing costs include in loan amount

There are some setbacks with a USDA home loan, however. If you choose not to put money down up front, you will be required to pay a mortgage insurance premium. These loans are intended to help low-income households, so there are also some eligibility requirements.

To qualify for a USDA home loan, you must:

  • Be a United States citizen
  • Have a minimum of 24 past months of dependable income
  • Have an acceptable credit history, with no accounts sent to collections in the previous 12 months.

Applicants who have a credit score of 640 or better receive streamlined processing, while those with less than a 640 credit score must meet strict underwriting standards. 

The biggest restriction for USDA loans is location. Most urban areas aren’t eligible for these loans, while most houses in rural areas are. There is some gray area within that restriction, however, as some suburban areas are eligible for USDA loans. You must also be below the max adjusted household income for the state and county you’re searching in. 

That’s a lot to keep in mind, but working with an experienced mortgage professional, like the ones at Bison State Bank, ensures all of your loan options are considered. 

Related: Home loan tips from an online mortgage lender

Down payment assistance

If you don’t qualify for an option that doesn’t require a down payment, and you can’t afford even a low average down payment on a house from a conventional loan, there are down payment assistance options available. 

Down payment assistance actually refers to a variety of programs available, typically aimed at assisting first-time home buyers. These include:

  • Grants: Programs that outright give down payment money.
  • Zero-interest, forgivable loans: While labeled a “loan” in name, these loans are actually forgiven over the course of time. Typically their forgiveness term is between 5 and 7 years, and the homeowner doesn’t have to pay the loan back as long as they remain in the home until after that period passes.
  • Low-interest loans: These loans, as the name suggests, contain a very low interest rate and can be repaid over time, typically in increments of 10 years. They help make homeownership more attainable by spreading the hefty up-front cost out over several years. 

Most of these down payment assistance programs are made for first-time home buyers, but many are eligible for repeat home buyers as well. Even if a program is labeled for first-time home buyers, you’re not necessarily counted out if you’ve owned a home previously. These programs usually define “first-time home buyers” as someone who has not owned a home in the last three years. 

What should be your down payment on a house?

The problem with just looking at an average down payment on a house is it removes many important factors from the equation. Think of your down payment options and equity like layers in a cake. You can pay nothing up front if you qualify for those options, and that can be a great way to get your foot in the door. But, you’re also building your cake from the ground up, and it will take longer to build your cake. 

With a conventional loan and a 3% down payment, the foundation of your cake is built and you can start to build on those layers. The more you can put down up front, the more stable your foundation is, and the more equity you have to start. 

There is a point of diminishing returns, however. Even if you can put 20% down up front and avoid mortgage insurance, that might not be the best option for you. If putting 20% down completely drains your bank account, it might be more prudent to put say 15% down and deal with mortgage insurance for the first portion of your loan until you reach the 20% threshold. 

Keep in mind the hidden costs

Your down payment isn’t the only money you will owe to complete your home buying process. There are many different closing costs like inspection and appraisal fees, and processing fees owed to your lender. These costs typically add up to 3-6% of your total house purchase, which adds even more to the average down payment on a house. 

Because of our internal processing at Bison State Bank, we don’t charge any lender fees. That’s just one way we help potential home buyers recover any hidden fee costs. 

Turn to Bison State Bank for your down payment guidance

All of this nuance is why you need an experienced guide to talk you through the home buying journey. The difference between putting even 3% down or 5% down is more significant than you think, and the home loan professionals at Bison State Bank have the knowledge you need to set you on the right path. 

Unlike other online mortgage lenders, our loan officers won’t try to fit you into a loan that’s not right for your situation. We are seasoned professionals in this industry with the experience needed to guide clients to their best down payment option for their needs. The end result leaves them satisfied with their purchase and confident in their decisions.

Contact us today to see how our honesty, integrity, and experience can help find you the right home loans.

A special thank you to our Director of Training and Development Originator, Emily Sappingfield, for providing her expertise on this topic.