Buying a home can be intimidating. There are many considerations that need to be made before you apply for a mortgage. Many people feel the most stress about the down payment for their home purchase.
The reason that the down payment can be a point of worry is that many people are not really prepared to put down enough cash to secure a mortgage. Trying to figure out how much money you need for a down payment might seem impossible, but there are some good rules of thumb to follow to determine this. First-time buyers might have to pay more than established homeowners, but if there are first-time buyers’ programs in your state, this might not be the case.
If you are ready to learn some more about the minimum deposit for a mortgage for a first-time homebuyer, you need to read on!
What is the Standard Down Payment for a Home?
Overall, the standard amount to have in cash for your home purchase is 20%. However, there are some situations that you might not need this much for your home down payment. Most first-time home buyers’ programs will reduce your down payment significantly. In some areas, the amount that you need to put down might be more like 10% rather than 20%. This will of course, depend on your overall credit and the amount of debt that you are carrying already.
The median down payment in the US for a home in 2019 was 12%. This statistic has likely inflated somewhat over the years since due to changes in the housing market, but this should tell you that 20% is a very conservative estimate. You will need to consider your overall credit, the amount of debt-to-income that you have on the books at the time that you apply for your mortgage, and the closing costs and other associated expenses involved in your loan.
The down payment is not really the total that you will need to spend to get your mortgage funded and secured. These factors probably have more to do with people being unable to secure a mortgage than the down payment.
The average down payment for first-time buyers in the US as of 2019 was only 7%. This should prove that there is no set standard or the 20% that you are often quoted. There are many other factors that are costly, but the down payment in cash is not always the factor that leads to stress for first-time home buyers.
What Else Should You be Aware of?
The reason that some first-time homebuyers cannot qualify for a home purchase even if they have the cash on hand for their down payment is that their credit, their debt-to-income, or the closing costs and other fees make the loan impossible to fund.
First-time buyers need to be aware that a lack of credit history can negatively impact your mortgage in many ways. When mortgages require more than about 10% down, this is usually because the borrowers looking for a loan have damaged credit or a complete lack of credit. Having a credit score under 680 will directly impact the amount of money that you will need to put down to secure your loan.
In addition, if you have a lot of debt already on the books, or you do not make very much money and have some outstanding debts at the same time, you might not qualify for a mortgage. You might also have to put down more cash to secure your mortgage if you have a high debt-to-income ratio. Banks use the DTI of a borrower to help determine if there is free cash in their budget to afford a large monthly payment. When there are other debts that need to be paid, this might impact your ability to secure your mortgage.
Closing costs are the last pain point for many buyers. The median closing costs that buyers in the US should expect to pay to secure a mortgage are $6,087, including tax and $3,470 excluding tax. This is a hefty sum of money, and it can be the difference for some borrowers between getting a loan for a home and not being able to afford one. These costs can feel like they come up out of the blue, and that is part of why the 20% cash-down payment is always quoted to borrowers. Having this extra capital on hand can help make this part of your loan process manageable.
You can sometimes secure a loan without closing costs, but this is rare. You might also get some benefits to reduce your closing costs through a first-time buyer mortgage program. You should still plan on these costs and be pleasantly surprised when they are not a big factor in your loan process.
First-Time Home Buyers Can Secure Loans With a Little Planning
If you have been worried about the down payment on your home loan, you should not be concerned overall. If you have good credit, low DTI, and some cash in the bank, you should be able to get a mortgage for your first home. Make sure that you stay on top of missed payments or issues with credit card charges and that you try to establish some long-term credit history before you apply for a home loan.
When banks can tell that you can manage payments correctly and that you have credit experience, you will have a leg up to get the home loan that you have been wanting. Buying a house doesn’t have to be stressful, and if you have the right plan in place to prepare for your home purchase, you will be able to secure your loan without a hitch. Plan for the 20% down payment if you want to have a significant financial cushion for your purchase process, but you might be able to get by with 10% or so down on your first home loan.