What is a Down Payment?

Coming up with a down payment may be the biggest hurdle for new homeowners. It can be difficult to understand exactly how much you need and what you’re paying for. Further complicating things are common misconceptions around a mortgage down payment, like that you need a full 20% down payment to buy a home. It's unlikely a lender requires 20 percent down, but there are things to consider when deciding exactly what you should put down.

What is a down payment on a house?

You make a down payment when you purchase a home using a mortgage.

The down payment costs a percentage of the total home purchase price. Down payments reduce the amount you need to borrow, which could help you get a lower interest rate on your loan and save money over the life of the loan. It also shows the lender that you have the means to make regular monthly payments.  

Your down payment amount will vary depending on the loan program. A standard conventional loan, for instance, requires a down payment of at least 5% of the purchase price in most situations. An FHA loan requires nothing less than 3.5%. Some lenders may require a higher down payment than the loan program minimum, particularly if you have a lower credit score or if you are purchasing a second home or investment property. In general, the larger your mortgage down payment, the lower your monthly payment will be and the less you will pay in interest over the life of the loan.

Why do people pay a down payment?

In most cases, some minimum down payment is required. Making a down payment helps both you and the lender.

There are several reasons to pay a down payment when purchasing a home:

• To reduce the amount you need to borrow: Paying a down payment reduces your total loan amount, which helps you secure a lower monthly payment on your loan.
• To demonstrate financial stability: Paying a down payment shows the lender that you have the financial means to make regular monthly payments on the loan.
• To lower the risk for the lender: The larger your down payment, the more financial risk you take on a loan. This helps the lender feel more comfortable funding the loan.
  
• To build equity: Your down payment becomes equity in the property. This goes hand-in-hand with the last point. Your down payment is a financial interest in the property, so you are less likely to default.
  

How much of a down payment do I need?

The loan program, house price and how you decide to use the home will decide your minimum down payment. Beyond that, it's up to you.

A conventional loan on a primary residence requires a down payment of at least 5%, though some lenders may require more. For instance, if you need a jumbo loan, a lender will probably require more money down.  

If you are considering a government-insured mortgage, like an FHA loan, you may be able to put down as little as 3.5%. If you are a qualifying veteran, VA loans do not require any down payment.

Generally, your required down payment will depend on a few factors, including the type of mortgage you are seeking, the price of the home you are purchasing and how you intend to use the home. If you're buying a second or investment home, for instance, you'll likely have to provide a higher down payment. If you’re unsure which program to go with, or what you may qualify for, talk to your Loan Consultant. They can provide you with more detailed information based on your circumstances.

What's the difference between down payment & equity?

Your down payment is the payment you make when purchasing a home. Equity, on the other hand, is the difference between the value of your property and the amount you still owe on it. For example, if you own a home that is worth $300,000 and you have a mortgage balance of $200,000, your equity in the home would be $100,000.  

Equity increases as your mortgage balance reduces. As you make payments on an amortizing mortgage, you gradually pay off the balance, which increases your equity in the home. Equity may also increase if your property value appreciates. To show a value increase, however, you may need to get a new appraisal, which could mean a refinance.  

A down payment contributes to building equity in a property, but it is not the same thing. The down payment is a one-time payment made at the time of purchase. Equity builds gradually over time as you pay down the mortgage balance and/or the value of the property increases.

Is a down payment a loan cost?

A down payment is not typically considered a loan cost. Loan costs are fees and expenses associated with obtaining a loan. Your down payment is your financial interest in the property and converts to equity in the home.

Examples of loan costs include origination fees, points, appraisal fees, and other closing costs. You pay these costs separate from the down payment, and usually, you have the option to roll them into the loan amount. The benefit of using CapCenter is that we pay for traditional closing costs. You don’t have to pay them at closing, and we don’t add them to your balance.  

One similarity between a down payment and loan costs is that requirements vary depending on the loan you get. Loan costs will depend on the type of loan you get and the lender you get it from. The size of your down payment will depend primarily on whether you get a conventional, FHA or VA loan.

Are there any zero down payment options?

Yes, there are mortgage options available that allow you to put zero down payment towards the purchase of a home.  

One option is a VA loan, which is available to qualifying military veterans and families. VA loans do not require a down payment. They also have relaxed credit and income requirements compared to some other mortgage programs, all of this making it easier for military members and veterans to qualify for a mortgage loan.  

Zero down payment mortgage options may make it easier to purchase a home, but, outside of VA loans, they may also come with higher interest rates and loan costs. You should speak with your Loan Consultant about any zero down payment options you may be considering.

What if I don't have the money for a down payment?

A down payment is not typically considered a loan cost. Loan costs are fees and expenses associated with obtaining a loan. Your down payment is your financial interest in the property and converts to equity in the home.

Examples of loan costs include origination fees, points, appraisal fees, and other closing costs. You pay these costs separate from the down payment, and usually, you have the option to roll them into the loan amount. The benefit of using CapCenter is that we pay for traditional closing costs. You don’t have to pay them at closing, and we don’t add them to your balance.  

One similarity between a down payment and loan costs is that requirements vary depending on the loan you get. Loan costs will depend on the type of loan you get and the lender you get it from. The size of your down payment will depend primarily on whether you get a conventional, FHA or VA loan.

The bottom line.

The big takeaway is that there is no normal down payment for a house. There are minimums depending on the loan program you choose. Beyond that, you should put down whatever fits your budget.  

When you’re buying a house, there are a lot of things to consider. Not least of which is the down payment. Deciding just how much you should put down will depend on a few things, including whether you currently own a house. Coming up with a down payment tends to be the biggest hurdle for new homeowners. Once you’ve owned, however, your equity in the current home can serve as your down payment for the next.  

If you are a first-time homebuyer, you’ll need to make sure you have at least the minimum down payment. Beyond that, it is important to consider what you can manage. Generally, there are benefits to putting more money towards your down payment, but it should not lead you to put down more than you can afford.