The golden rule of real estate says that you need to have a 20% down payment when you purchase a home. It's a principle and a great idea , but in practice, it can be very difficult for buyers (first-time homebuyers) to put forth 20% of a home's asking price on top of it the buyers need to remember they'll be responsible for some if not all of the closing costs, meaning even more money is required upfront to get the keys to a home.
The 20% down payment is not a magic number any more… because more and more lenders offering many great programs with only 5% conventional loans or even 0% down 100% financing FHA programs.
However, in the seller’s real estate market where there may be competing offers, a buyer with a larger down payment may be more attractive to the seller since it demonstrates a stronger offer with better ability to secure the final mortgage. On the other side, people putting down less money having more cash on hand for other home improvement or even repairs.
The 20% is still the accepted golden rule but with today’s average home prices is a pretty high bar, especially if the buyer isn’t rolling over proceeds from a previous home sale into the new home purchase or using all saved funds to get the financing.
But what about PMI?
When buyers use a down payment of less than 20%, then PMI (which many buyers perceive as very expensive) must be placed on the home loan to insure the lender in the event of a foreclosure. If a borrower is using a 15% down payment with a 760 credit score, the monthly PMI could be quite small relative to the loan amount and over the past 10 years, private mortgage insurance companies have worked to reduce what are called PMI risk factors (the higher the factors, the higher the PMI) and change things for the better and more affordable. If PMI is the main thing to consider, buyers are better off working to improve their credit scores .
So how much should you put down?
There is still the best option have the 20% down but there are still other variables that factor in to how much you should put down. That's where the type of loan you're eligible for will come into play.
For homebuyers who are active duty or honorably discharged veterans, the Veterans Administration offers mortgages with a zero percent down payment only available to a select subset of the population, but the VA home loan is the best in the United States.
There are many programs that provides loan with down payments ranging from zero to 3%. Homebuyers who qualify for Federal Housing Administration (FHA) loans can put down as little as 3.5%, as well as Freddie Mac and Fannie Mae offer conventional mortgages with 3% down payments.
It's best to meet with a loan officer and discuss the best option for your situation and shop around for the most competitive interest rates and lowest origination fees.