When a 3%, 5%, or 10% Conventional Loan Down Payment is Better

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As housing prices continue to climb, lower down payment mortgage options are becoming a vital tool for first-time homebuyers looking to enter the market. Rather than waiting and saving for years while paying rent, a low down payment and a strong credit score can help you purchase a home sooner. The amount you need to put down and the mortgage options available to you depend on your financial situation and credit score. We will first look at conventional loans.

Minimum Down Payment for a Conventional Loan

You can secure a conventional loan with a down payment as low as 3%. Most lenders will require you to pay for private mortgage insurance (PMI) if your down payment is below 20%, but this hasn’t stopped many Americans. In fact, the majority of first-time homebuyers put down less than 20%.

The Benefits of a 3% Down Payment

For first-time buyers or those who haven’t owned a home in the last three years, 3% can be a great way to get into the market:

-Early Market Entry: Instead of paying rent and building your landlord’s equity, you can start building your own equity sooner.
-Stay Ahead of Rising Prices: Purchase a home before property values increase further and make it harder to buy.

With just a 3% down payment, you can qualify for a fixed-rate mortgage up to $625,000 (in most areas) for single-family homes, condos, townhouses, and planned unit developments (PUD). However, you will need to pay PMI until your equity reaches 20%.

The Advantages of a 5% Down Payment

A 5% down payment provides more flexibility and benefits:

-Variety of Mortgage Options: Choose between an adjustable-rate mortgage (ARM) or a fixed-rate mortgage.
-Potentially Lower Interest Rates: A larger down payment might secure you a lower interest rate from lenders.
-Financial Flexibility: Keep more cash on hand for emergencies and other needs.

If you’ve owned a home within the last three years, you’ll need at least 5% for a conventional loan. A key benefit of a 5% down payment is eligibility for ARMs, which can be advantageous if you plan to sell the home within a decade. ARMs typically start with a lower fixed interest rate for the first 5, 7, or 10 years before adjusting periodically.

The Perks of a 10% Down Payment

Putting down 10% has several benefits:

-Lower Monthly Payments: A larger down payment reduces your mortgage amount, leading to lower monthly payments.
-Shorter PMI Duration: You’ll pay PMI for a shorter period compared to lower down payments.
-Second Home Purchase: You can use the mortgage to buy a secondary residence.

In 2020, the average first-time buyer put down 7%. By putting down 10%, you position yourself even better. This down payment can qualify you for both fixed-rate and adjustable-rate mortgages up to $548,250 (in most areas). For more expensive areas, if you have just over a 10% down payment and excellent credit, you might qualify for a jumbo loan, which comes with stricter requirements.

Zero Down Payment Option with VA Loans

If you’re an eligible service member, veteran, or surviving spouse, a VA loan can enable you to buy a home with no down payment. VA loans offer competitive rates, no PMI, and flexible qualification criteria, making it easier for veterans to achieve homeownership.

Getting Ready to Buy

If you’re considering how much you can afford, the next step is to determine your homebuying budget. Getting pre-approved can take just a few minutes and provide you with a clear picture of how much home you can afford. With the right approach, you might be ready to buy your new home sooner than you think.




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