First Time Home Buyer Down Payment

By Stevie Duffin Updated on 7/20/2017

For many first time home buyers, down payments can be a significant obstacle to obtaining a mortgage loan, as most home loans require sizeable sums up-front. This article will let you know what options are available to every type of first-time home buyer.

Down Payment Requirements

Down payment requirements vary from program to program. Essentially, the amount required for a down payment will be larger for uninsured loans, since lower down payments present an increased risk to lenders.

Low Down Payment Loan Programs

With the protection of a guarantee, lenders can offer government-backed mortgages with lower down payment requirements. Therefore, several loan programs are available to first time home buyers that offer a low minimum down payment:

• FHA loans require only a minimum of 3.5% down, although borrowers must have sufficient credit to mitigate the risk and qualify for this low down payment.

• VA loans are available for Military veterans and eligible active duty servicepersons. With a VA loan, you can finance an entire home purchase with no down payment.

• USDA loans (also known as Rural Development loans) do not include any down payment requirements. However, only borrowers purchasing homes in “rural areas” (as designated by the U.S. Department of Housing and Urban Development) can qualify.

These federal loan programs could also suit first time home buyers with bad credit, as the government guarantee will alleviate some of the lender risks in financing these loans.

Advantages of Larger Down Payments

While making a larger down payment might not be feasible for all borrowers, it presents several distinct advantages for those able to gather the necessary funds:

• Lower Interest Rates – Since a larger down payment translates to less risk for lenders, borrowers can expect to receive much lower interest rates with more money up-front.

• Lower Loan Cost Overall – With lower mortgage rates, borrowers will make reduced monthly mortgage payments, and the cost of the loan will be less overall.

Avoiding Private Mortgage Insurance with a Large Down Payment

Private mortgage insurance (PMI) is a set of fees levied to borrowers that protect lenders from taking substantial losses in the event of borrower default. These expenses provide no inherent benefit to borrowers, other than allowing them to obtain home loans with more risky credentials, including smaller down payments. 

However, with a down payment of 20% or more, borrowers can avoid these expensive fees for their home purchase, which can amount to between 0.5% and 1% of the loan amount annually.

Tips for First Time Home Buyers

1. Pay Off Other Debts First. When preparing a down payment on a first home purchase, many prospective buyers forego paying off credit cards and other forms of debt. However, credit card debt and similar forms of debt charge much more for interest than home mortgage debt, given the current market trends. 

Additionally, since lenders will consider a borrower’s overall debt, it is advisable to save for a down payment after paying off higher priority debts, such as credit card debt.

2. Put More Money Down (if possible). Again, a larger down payment has significant advantages. While it's difficult to do in the short term, putting down more money can save borrowers a substantial amount, whether it be by eliminating PMI or lowering the mortgage interest rate.

3. Consider a Down Payment Gift. For first time home buyers who cannot afford the minimum down payment, consider asking family for help with a financial gift.

4. Draw from 401k. In some cases, a first time home buyer's 401k funds can be used as a portion or entire down payment, although withdrawing money from a 401k may include penalties.