If you have finally considered applying for a mortgage loan, you may have heard of the word down payment. What does it mean? How much do you have to pay?

A down payment is a percentage of a home’s sale price you need to pay upfront. Mortgage lenders need this before they lend you the remaining cost of a house to buy it.

Let’s say, you are looking at a house worth $200,000 in cash. A mortgage lender pays whatever’s left after you settle the down payment of up to $40,000 so you can buy the house.

Unfortunately, $40,000 is a lot of money for many people. That is why down payment assistance (DPA) programs exist to help homebuyers afford it.

CLICK HERE TO LEARN ABOUT BUYER ASSISTANCE PROGRAMS.

The down payment is like the doorstep but also the barrier to your dream home. So, having the funds for it is important so you can finally buy a house. The guide below provides more information about it and programs you can apply for help paying it. 

On to breaking the barriers of homeownership!

Express Takeaways

• In a mortgage, a down payment is an upfront fee for a house to reduce its cash price. It is only a percentage of the home’s total value.
• You can pay the remaining cost of the house within a set period.
• Most mortgage lenders require a down payment from home buyers. This shows proof of investment and commitment to the sale.
• The standard down payment for a home in the US is 20%. Loan programs help those eligible to pay 0% to 15% upfront fees. Homebuyer Wallet also helps first-time homebuyers find the right assistance programs for them.
• Once programs take care of your down payment, you only have to consider the closing cost. 
• The home’s total price and loan program affect the down payment amount.

What is a Down Payment?

A down payment is an upfront fee you pay a mortgage lender for a residential mortgage. Financial institutions may ask for up to 20% of the home’s sale price first to close a mortgage. However, companies that receive insurance from the government may set this as low as 10% to 0%.

How do Downpayments Work?

You apply for a mortgage loan so that a lender pays most of the house’s sale price upfront. But, before they do it, they must know if you commit to the loan. So, they will ask you to pay the down payment, a percentage of a home’s total cost. 

To fund the lender’s rule, you may use your available funds or ask for help paying it. You may also contact Home Buyer Wallet to find a program to help you raise funds.

You then bring the money for the down payment and other costs to the closing. This is when you pay the lender and sign documents for them to pay the seller with the remaining balance. You can then start packing since you will get the keys to your new home in a few business days.

Over time while living in it, you pay part of the remaining balance, interest, taxes, and insurance. It’s called a monthly mortgage payment that you settle until you repay the loan. So, like renting, you have monthly dues except that you pay for a house you own. 

Why do Mortgage Lenders Need A Down Payment?

Lenders need a down payment as it takes a percentage of risk from them and it also serves as

• Proof that you invest in the sale
• Sign that you commit to paying the remaining balance

Mortgage lenders may ask for up to 20% down payment but you may pay as low as 10% to 0%. As government-backed programs allow qualified applicants to pay little to nothing upfront. 

What Programs Can Help Me with the Down Payment?

The following government-backed programs are available for qualifying mortgage applicants:

• FHA loans for individuals with low credit scores.
• USDA housing loan for low- and very low-income individuals/families.
• VA-backed sale loan for veterans, service members, and spouses.
• HomeReady and HomePossible mortgages for a low down payment of 3%.

The above loans accept cash gifts and down payment assistance from organizations.

Who May Provide Cash Gifts to Help with the Down Payment?

The following people may help you with the down payment on a house.

• Parents
• Spouse
• Children
• Employer
• Non-profit organizations

Mortgage lenders need proper documentation on the source and transfer of cash gifts.

Who May Provide Down Payment Assistance (DPA) Programs?

The below list includes some of the resources for DPA programs.

• Federal Home Loan Banks
• Local government agencies
• Non-profit organizations

Home Buyer Wallet provides a list of all the DPA programs available in the USA. Visit the website to find out who may provide you with down payment assistance to buy a home.

How Much Down Payment Will I Pay?

If your dream home costs $200,000 at a 30-year mortgage term, you may have to pay the following down payments:

• 0 under a USDA loan and VA-backed sale loan. 
• $7,000 at a 3.5% down payment under a qualified FHA Loan.
• Between $10,000 to $30,000 at a 5%-15% down payment under a conventional loan with private mortgage insurance (PMI).
• $40,000 at a standard 20% down payment.

You also have the option to pay for a higher down payment if you have the funds.

What are the Benefits of Paying a Higher Down Payment?

If it’s available to you, you may pay a higher down payment and enjoy the following:

• More minor money to borrow from the mortgage lender. A higher down payment is a higher deduction from the home’s sale price.
• Smaller monthly payments.
• No need to pay extra for private mortgage insurance (PMI). Mortgage lenders only need this if you pay a smaller down payment. 
• Better interest rate.

A higher down payment may help you save in monthly mortgage payments.

How Much Monthly Mortgage Payment Will I Pay?

The below table shows an approximate monthly mortgage payment.

How Much Down Payment Should I Pay?

The amount of down payment you need to pay is set by a mortgage lender. But, regardless of the percentage of the home’s sale price, programs can cover all or most of it. You only have to think about the cost to close your mortgage loan. It is only 2%-6% of the home sale price.

How Much is the Smallest Down Payment?

It is hard to figure out how small a down payment you can make because the home’s sale price and loan program affect it.

Are there Alternatives to Paying a Higher Down Payment?

You can add an extra payment to your monthly mortgage payment. It will deduct the remaining principal balance. But, ask your lender if they will not charge you a prepayment penalty if you do it.

How Can I Save for an Extra Down Payment on a Home?

If you plan to save extra money for a down payment, follow the tips below.

• Tighten your budget.
• Lower the costs of your current house.
• Automate your savings by creating a regular automatic deposit with your bank.
• Use a savings app that rounds up purchases to the nearest dollar and saves money.
• Review The Consumer Financial Protection Bureau’s Start Small, Save Up.
• Review Federal Trade Commission’s Make a Budget.

There is no need to pay a higher down payment so only aim for it if you can.

A down payment is up to 20% of a home’s sale price a mortgage applicant needs to pay upfront. Once it’s settled, a lender will pay the remaining price of a house so you can finally buy it from a seller. Loan programs and financial aids are available to pay part or all the down payment. So, fulfilling your dream of owning your home is now at your fingertips. Apply now in DPA programs to pay little to nothing on a down payment for a house!

Article Sources

Homebuyer Wallet requires its writers to get information from original and reliable resources. Please see our editorial policy to learn more about our standards for producing factual information and content.

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