If you read articles about buying a home, then you'll undoubtedly see many of them recommending 20% of the home's value as a down payment.
Unfortunately, this amount scares many prospective buyers because it represents a significant investment that either don't have or aren't willing to commit right now.
Do you actually need to put 20% down to get a mortgage? If not, what is the average down payment on a house in the United States?
It turns out, the answer to this question about the average down payment amount has a straightforward answer. Read on to learn more about down payments and why homeownership might be more attainable than you think!
What Is the Average Down Payment for First-Time Homebuyers?
While the recommended down payment for a home may be 20%, there are several loans for first time home buyers that require way less than this.
As a result, the average down payment for first-time homebuyers is just 6% of the home's value. On a $300,000 home, that means the average buyer would put down $18,000 – well short of $60,000 that would be required for a 20% down payment that many financial gurus recommend.
So, why would anyone put down 20% if you don't have to?
Well, while you don't need a 20% down payment to get these loans, many people try to put down the 20% to avoid paying PMI or private mortgage insurance on top of the standard mortgage payment.
In fact, almost all mortgages require some mortgage insurance when there's less than 20% down. Buyers typically have to pay this insurance until they have 20% equity in the home, at which point the bank either stops billing it altogether or the buyer has to refinance to remove it. Mortgage insurance is not cheap, as it usually costs between 0.5% and 1% of the loan's value.
As a quick example, if your home's value was $250,000 and your mortgage balance is $225,000, that would mean you'd pay anywhere between $1,125 and $2,225 per year until your mortgage balance was $200,000. When you hit that amount, your bank may automatically take off the PMI payments with a conventional loan. However, if you have an FHA loan, you'd need to refinance it into a non-FHA loan to remove the mortgage insurance premiums.
Given that the average down payment for a first-time homebuyer is 6%, that means that most people have 14% equity to build before they could get rid of this extra monthly cost.
So, while you can get a house with less than 20% down, you may want to consider whether it is worth paying the extra cost in insurance. While the average is 6% and most people do pay PMI, you'll need to decide if that is the right route for you.
The Average Down Payment for Repeat Buyers Is Less Than 20%
Perhaps somewhat surprisingly, the average down payment for repeat homebuyers (that is, those who have purchased their first home and are getting a new one or buying a second one) was not significantly higher. According to the National Association of Realtors, repeat buyers typically financed 84% of their home's value. That means they had a down payment of about 16% of the purchase price.
Not even repeat buyers, who have benefited from capital appreciation, come up with 20% down as the average!
These statistics mean that, on average, people buy into a home with about 6% down and pay it off just enough to buy another property with 16% down. In both instances, though, the average homeowner continues to pay PMI even on their second loan!
Mortgage Options That Don't Require A 20% Down Payment
If you're one of the millions of Americans who want to buy a home but don't have 20% down, you're in good company. You should know that your situation isn't unique. Instead, it's quite common and ordinary!
Buyers without 20% down typically have three loan options that work best: FHA, VA and Conventional loans.
FHA (Federal Housing Administration) Mortgages
Arguably the most common mortgage that requires very little down is the FHA mortgage. These mortgages receive backing from the Federal Housing Administration. The FHA guarantees them for banks, so there's a minimal downside to the financial institution to make the loan.
FHA loans require a minimum down payment of just 3.5% of the loan's value. On a $200,000 home, that would mean a down payment of $7,000, which is much more attainable than 20% down!
The downside to FHA loans is that the mortgage insurance premiums are high, and you have to pay them for the loan's entire duration. If you want to stop paying mortgage insurance, you have to refinance the loan.
VA (Veterans Administration) Mortgages
If you are a veteran, you're in luck when it comes to buying a home! VA loans are arguably the best for mortgages with a low average down payment. The reason is simple – the minimum down payment is 0%.
That's right, 0%. You don't need to put anything down with a VA loan. What's even better is that a VA loan doesn't require any form of mortgage insurance. So, not only do you not have to put anything down, but you don't have to pay extra every month. That's a pretty sweet deal!
Some conventional mortgages can work with as little as 3% down. However, most conventional loans require at least 5% for approval. Some lenders may even institute higher minimum down payments like 10% or even 20%. If you're looking for a jumbo loan, expect the down payment requirements to be even higher.
All conventional loans will require PMI until the equity in the home reaches 20%. As such, expect to pay somewhere between 0.5% and 1% of the loan's value until you get that amount.
States Often Offer Additional Down Payment Assistance
Many states offer additional assistance for first-time homebuyers. Georgia, Florida and Texas are just a few of the states that offer several programs to help you get into your first home. If you're buying your first home it can be a good idea to do your research and look into the different programs that are available to you.
Buy A Home With SimpleShowing + Get $5,000 Towards Your Closing Costs
If you're looking to buy a home, you should know that you have options and that homeownership probably isn't as far away as you think. Whether you have 0% down, 5% down, or 20% down, there are likely ways to stop renting and start owning! Between the different loan types and state incentives, there's almost always a way to own a home and begin building equity.
Plus, SimpleShowing makes this even easier by giving all buyers $5,000 on average towards closing costs. Besides down payment, closing costs are one of the biggest upfront expenses when purchasing a home, so this refund is huge!