Making Down Payment Options Easy to Understand
Bring It Home with Heidi (BIHWH) recently sat down with Joe Racamato (JR), a home financing veteran, to discuss the ins and outs of down payment.
BIHWH: "What is a down payment?"
JR: "A down payment is the percentage of your home's purchase price that you pay upfront."
BIHWH: "Exactly how much is needed to purchase your dream home?"
JR:" Contrary to popular opinion you do not need 20% to put down. For a conventional loan (a loan not backed by the government), a 20% down payment is needed to avoid private mortgage insurance (PMI), but there are options if you do not have that much in liquid assets available to you."
BIHWH: "What are some of the other options available?
JR: "Conventional loans require 20% down or paying PMI until the loan-to-value ratio is below 80%. For those that qualify, Government loans from programs like those listed below have more flexible down payment options and less strict credit requirements than conventional loans.
Federal Housing Administration (FHA) loans offer loans with a down payment as low as 3.5%. They focus on first-time home buyers and those with lower incomes. The definition of a first-time homebuyer includes someone who has not owned a home for a three-year period, a single person who previously owned a home with a spouse, and a person who previously owned a mobile home.
VA loans from the U.S. Department of Veteran's Affairs offer home loans with little or no down payment for current and retired military members.
USDA home loans are for people buying a house in rural areas. They have an income limit and require no down payment.
Home Ready/Home Possible loans from Freddie Mac and Fannie Mae are for low- and moderate-income families making less than 80% of the area median income. The down payment is as low as 3% and reduced mortgage insurance is possible with 10% down.
BITHWH: "What is the average down payment?"
JR: "The average down payment varies significantly based on different factors and borrower profiles.
Repeat buyers: The average down payment for people who previously owned a home in 2018 was 16%.
Loan size: The lower the loan, the more likely the borrower puts down less than 20%. In the first half of 2019, the average loan size for borrowers putting down less than 20% was $280,260. The average loan size for borrowers putting down 20% or more was $357,650.
Average FICO Credit scores: Having good credit does not necessarily mean a larger down payment. Between 2017 and 2019, borrowers who put 20% or more down on a conventional loan had an average credit score of 748. Those who put less than 20% down on a conventional loan had an even higher credit score of 762.
Age: Not surprisingly, the younger you are, the less likely you are to put more money down. Between July 2018 and July 2019, the median down payment for buyers:
●ages 22-29: 8%
●ages 30-39: 10%
●ages 40-54: 13%
●ages 55-64: 19%
●ages 63+: 25.5%
BIHWH: "Very Interesting Joe - so what are the various ways that people fund their down payments?"
JR: " Based on a recent survey conducted by Freddie Mac, homebuyers funded their down payment in the following ways:
●70%: Savings, retirement, inheritance, and other personal assets
●31%: Proceeds from selling another home
●10%: Assistance or loan from nonprofit/government agency
●4%: Second loans, home equity loan or equity line of credit