How Much Money is Needed for a Down Payment?

First-time home buyers may spend months or years saving money in the hopes of buying their first home.  These individuals need to know how much to save, so they can hit their target.  Determining the precise number to save for a down payment can be confusing since there are a few special programs first-time homebuyers can take advantage of. Here is what you need to know about saving for a down payment on a house.

What is the Average Down Payment Amount?

In general, homebuyers should prepare to put down anywhere from 5 percent to 20 percent of the price of the home.  The mortgage lender then loans the rest of the home’s purchase price to be repaid over time, generally 15 to 30 years.

If you can put down 5 percent or 20 percent, why would you want to pay more?  It is simple: lenders tend to require buyers who put down less than 20 percent to purchase supplementary private mortgage insurance or PMI. PMI protects the lender from the likelihood you will default on your mortgage. Right or wrong, the bank assumes that a borrower who can pay 20 percent upfront is less likely to default than someone who can put down only 5 or 10 percent of the home’s price. Thus, PMI extends zero benefits to buyers, other than allowing them to buy a home with less money down.

Several factors determine the cost of private mortgage insurance: your credit score, your mortgage terms, your down payment amount, and your loan terms. You’ll continue to pay PMI until you reach 20 percent equity in your home.

Many home buyers prefer to either save more money and avoid PMI or to choose a cheaper home, stretching their limited budget to receive greater home equity.

Programs For First-Time Homebuyers

To encourage homeownership, the government offers incentives for first-time homeowners. These make it possible to buy a house without putting 20 percent down or taking out PMI. At the national level, there are programs for special populations including:

• Veterans 
• First responders 
• Educators 
• Rural residents 

There are also options for home shoppers who want to buy fixer-uppers or those with weak credit. State programs exist too. Buyers should research the options available in their community and nationally to see whether they qualify.

Understanding your options for buying a home is the first step to saving up for that down payment. Spend time learning about these programs to determine whether you are a fit. Take steps to improve your credit score, which positively affects the terms of your loan. Finally, research mortgage lenders near you who may welcome inexperienced home buyers. Taking these steps as you save for your down payment allows you to progress toward homeownership without getting in over your head.