One of our primary goals at Bison State Bank is educating our community. That doesn’t just mean our clients, either. Neighbors, friends, relatives, everyone has questions about home loans, and we’re happy to answer whenever they arise!
One of the most popular questions our loan officers receive is about home loan down payment and what that means for your overall mortgage. It’s an understandable curiosity too, especially when looking at how much an average down payment on a house can be.
So let’s dive into home loan down payment, what you should expect, and how your down payment sets up your long-term mortgage goals.
But first, what is a home loan 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.
The number most people associate with home loan down payments is 20% of your total home cost, but that’s a common misconception. 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! Here’s a quick breakdown of some of the different loan types, and your down payment options.
Conventional fixed 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.
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. Borrowers can qualify for an FHA loan with a minimum of a 500 credit score with a 10% down payment, but a 3.5% down payment is acceptable for 580 credit scores and above.
With a home loan backed by the Department of Veterans Affairs, our nation’s veterans can purchase a home with no down payment required at all. 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), and Public Health Service.
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.” 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 with a credit score of 640 or better receive streamlined support. The biggest restriction for USDA home loans is location, but even if your home search is in a more urban area, some suburban neighborhoods are eligible for USDA loans.
How your down payment affects your mortgage
Your down payment is the entry pass to home ownership, but it’s more than just a golden ticket. Depending on your down payment decision, you’re setting up your entire life of your mortgage.
Since you’re paying money on the principal amount owed on your house, you’re effectively deciding what your monthly payment is with your down payment. If you choose to pay more up front, you can actually lower how much you owe each month because the amount you have to borrow is less. And that doesn’t even factor in the cost of a mortgage insurance premium for less than a 20% down payment.
Related: What is mortgage insurance?
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 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.
Turn to Bison State Bank for home loan 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 6% 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.