How Much Should Your Home Down Payment Be?

If you are in the market to buy a home in Sioux Falls, one of the first obligations you need to navigate is the down payment. There are many home buying myths surrounding how much this amount should be.

There isn’t a fixed amount as down payments are calculated in percentages and they can range between five to 20 percent of your home’s purchase price. In some instances, you can buy a house with no money down, although this may not be as advantageous as it seems. To clarify how much your down payment will be, the team at Amy Stockberger Real Estate (ASRE) is here to examine your home down payment options.

What Is a House Down Payment?

A down payment is the amount you pay on your mortgage to gain access to equity in your home. When you take out a home loan, the lender controls most of the equity (ownership) in your property. But if you pay a larger amount upfront – in the form of a down payment – you will repay less on your mortgage and have quicker access to other homeownership perks such as refinancing.

The 3 Factors That Affect Your Home Down Payment

If you want to calculate what the down payment on your mortgage will be it's important to understand the factors that influence this figure. These factors will help you determine how much your eventual down payment should be according to banking guidelines and how much you can afford to pay on your mortgage.

The Price of the House

The foundation of how much your home down payment will be is the price of the house. The less your home costs the less you need to pay upfront.

Your Access to Other Lending Options

There are several types of home loans in Sioux Falls and across the country. These options are either bank-backed loans or government-endorsed. Government home loans generally have fewer down payment requirements, providing more potential opportunities for homebuyers.

How Much You Can Afford to Repay

How much you can afford in monthly installments should be another factor to consider when determining how much you should save for a down payment. The less you contribute toward a down payment on your mortgage, the more you’ll pay in monthly fees, which can make it challenging to maintain monthly repayments if your financial situation changes.

Types of Home Loans

Whether you’re a first-time homebuyer or military veteran, there are several types of home loans available. Each of these options affects your down payment, your loan amount, and how much your effective repayment will be. This brief overview should help you navigate each loan type with greater confidence.

VA Loan

Available to veterans, VA loans are backed by the Department of Veterans Affairs. Veterans and military service members aren’t required to have a down payment or mortgage insurance; rather, they will pay a veteran funding fee to access this type of loan.

FHA Loan

FHA loans have the most lenient down payment stipulations. An FHA loan requires a credit score of only 500 and down payments can be as low as 3.5 percent.

USDA Loan

If you’re purchasing a home in rural South Dakota, you may qualify for a USDA loan. These mortgages are only available for properties in pre-selected areas and often require low (and in some instances) no down payment. However, you will be subject to income and property value limits.

Conventional Loan

A conventional mortgage has the most home down payment requirements. You need to have a debt-to-income ratio of less than 50 percent and a credit score of 700 or higher. However, these mortgages commonly have the fewest monthly repayment costs associated with any loan. If you take out a conventional loan it will also require a down payment of between 10 percent and 20 percent.

Is a 20 Percent Down Payment Necessary?

The 20 percent down payment became the standard when taking out a mortgage due to the cost of Private Mortgage Insurance (PMI). Homeowners who paid 20 percent didn't have to pay PMI, whereas homeowners who didn't pay 20 percent would pay PMI. When more buyers realized PMI doesn't protect the homeowner but rather the bank, the benefits of paying 20 percent to avoid PMI became redundant.

Additionally, with more loan options available, buyers no longer have to rely on conventional loans to access homeownership. Nevertheless, 20 percent is still a beneficial down payment amount if you can afford it because it gives you more leeway and ensures you pay fewer fees and interest on your mortgage.

If you’re in the process of buying a home in Sioux Falls, South Dakota, the experts at ASRE are here to help you navigate all mortgage options. Our years of experience and success include helping homebuyers secure advantageous loans and entering the housing market on their terms.