When buyers ask how much do you need for a down payment, they’re usually hoping for a simple answer, like an exact dollar amount or an exact percentage of the home’s purchase price.
But the truth is, your down payment depends on many factors, including your type of mortgage loan, your credit score, and your lender.
Here’s what you need to know about how much to save for a down payment.
How Much Do You Need For a Down Payment
The old rule of thumb was that you would need to save 20% of the purchase price. But as home value growth outpaced income growth, it became unrealistic for the average household to save enough for a 20% downpayment in a reasonable time frame. So lenders adjusted mortgage loan terms to accommodate lower down payments. If you can’t put 20% down upfront, you can put down less and pay a monthly fee for private mortgage insurance (or pay a higher interest rate if your lender allows).
Today, you likely only need a down payment of around 3-5% of the home’s purchase price, depending on your credit score, financial situation, and lender. Some conventional loans require just 3% down with good credit, although 5% is more common. FHA mortgages are a popular option for first-time homebuyers and require just 3.5% down with fair credit. With questionable credit, you might still qualify for an FHA loan with around 10% down.
For reference, with the median sold price in the Bay Area at $1,225,000 (as of the end of the first quarter, 2021), a 3.5% down payment would come to $42,875.
What About 0% Down Payment Options?
0% down payment options are available, but they are reserved for special circumstances. VA loans, for example, allow active military members and veterans to buy with 0% down. There are also USDA loans that allow buyers to put 0% down on rural properties.
It’s important to note that sellers aren’t required to accept offers that rely on these 0% down payment programs. Many sellers are hesitant to accept offers with 100% financing because there is a greater statistical probability that the financing could fall through, preventing the deal from closing. This is why sellers prefer all-cash buyers. If sellers have competing offers at the same price, they will choose the offer that is most likely to close successfully.
A Higher Down Payment May Strengthen Your Offer
In a hot seller’s market where multiple buyers are competing for each listing, a higher down payment can strengthen your offer. The more you can put down, the more confident the seller can be that you will be able to secure the remainder in financing to close the deal.
A higher down payment also affords you the option to waive the appraisal contingency. Typically, an independent appraisal needs to confirm that the home’s value is at least as much as the purchase price before the lender will agree to finance the purchase. But if you can put enough down to cover the difference between the appraisal amount and the loan amount, then the bank doesn’t mind if the appraisal comes in low because you are taking responsibility for the amount of the difference. Waiving this appraisal contingency is another way to remove a hurdle from the transaction and improve your chances of getting an offer accepted.
Additional Items to Include in Your Purchase Budget
The down payment isn’t the only expense you’ll need to plan for when buying a home. You’ll also need to make sure you have enough saved to cover closing costs (typically 3-6% of the purchase price) and the costs of any repairs or renovations you plan to tackle in your new home.
It’s also a good idea to leave a cushion for unexpected repairs. As a homeowner, you might not know what will need to be repaired or when, but you can bet something will need an unexpected repair at some point. It’s best to be prepared.
How Sequoia Can Help
The experienced real estate agents at Sequoia real estate know what it takes to get an offer accepted. Whether you’re just starting to think about buying or you’re ready to make an offer, we provide personalized guidance through the purchasing process. Contact us today for a free buyer consultation.