How Much Money Do I Need to Put Down on a Mortgage?

How Much Money Do I Need to Put Down on a Mortgage?

When you apply for a mortgage to buy a home, expect to pay something up front with a down payment. Your down payment can significantly reduce the amount you owe to the lender, the amount of interest you pay over the life of the loan, and your monthly mortgage payment.

Down payments commonly range from 3% to 20% of the purchase price. The average first-time home buyer pays 6% upfront and obtains a mortgage from a bank or other financial institution for the balance.1

KEY TAKEAWAYS:

  • The down payment impacts your mortgage type, the amount of your loan, and the loan’s terms and conditions.
  • A larger down payment will give you a lower loan-to-value ratio, or LTV, and you may qualify for lower interest rates.
  • The average first-time home buyer pays 6% upfront and finances the balance.
  • Down payments commonly range from 3% to 20% of the purchase price.

Understanding a Down Payment:

The size of your down payment depends on your savings, income, and budget for a new home. The amount you designate as a down payment helps a lender determine the loan amount for which you qualify and the type of mortgage that meets your needs. Paying too little upfront will cost you interest over time while putting down too much could deplete your savings or negatively affect your long-term financial health.

How Much House Can You Afford?

Pre-approval:

A mortgage pre-approval is an official step where a lender verifies your financial information and credit history. Your mortgage application collects information regarding your estimated down payment amount, income, employment, debts, assets, credit report, and credit score.

When you are preapproved for a mortgage, a lender determines the maximum loan amount you qualify for based on responses in your application. A pre-approval letter from the lender shows sellers that your financial information has been verified and you can afford a mortgage.3

Loan-to-Value Ratio:

Your down payment plays a role in determining your loan-to-value ratio, or LTV. To calculate the LTV ratio, the loan amount is divided by the fair market value determined by a property appraisal. The larger your down payment, the lower your LTV.

A lower LTV ratio presents less risk to lenders because you are adding more equity to your home and have a higher stake in your property relative to the outstanding loan balance. Since lenders use LTV to price mortgages, a lower LTV means you’ll likely pay a lower interest rate on your mortgage. When your LTV ratio exceeds 80%, you’ll likely pay for Private Mortgage Insurance (PMI).

Conventional Loans

Fannie Mae and Freddie Mac Programs (3% Down):

Fannie Mae’s HomeReady mortgage program allows a 97% LTV ratio for credit-worthy borrowers. 8 Freddie Mac’s Home Possible Advantage mortgage also offers a 97% LTV ratio for borrowers but requires a minimum credit score of 660 to qualify.9 The program will even consider some borrowers with no credit score by building a non-traditional credit report as long as those borrowers meet certain debt-to-income and loan-to-value ratio guidelines.10

Individual Lender Programs (1% to 3% Down):

Many lenders offer Fannie Mae and Freddie Mac’s programs and add their down payment assistance benefit for a conventional loan. For example, Wells Fargo’s Dream. Plan. Home. mortgage allows for a 3% down payment for borrowers at or above 80% of area median income requirements.11

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