For people who want to purchase a home, saving up for the down payment is often one of the most difficult hurdles to overcome. However, you may not need to put as much money down as you think. Down payment requirements vary depending on the price of the home you want to buy, your credit and the kind of mortgage you are applying for.

Mortgage Lender Down Payment Requirements

The amount of down payment you need can vary significantly depending on which type of mortgage you are applying for.

Conventional

The lender decides how much down payment to require for a conventional loan. It is common for lenders to offer borrowers with better credit scores lower down payment options because they are a lower risk. You will need to pay at least 3% down for most conventional loans, and the lender may require you to purchase private mortgage insurance if your down payment is less than 20%.

Federal Housing Administration

The minimum down payment requirement for FHA loans is 3.5% for borrowers with credit scores of at least 580. If you qualify for an FHA loan with a credit score between 500 and 579, you must make a down payment of at least 10%. Borrowers in this program must purchase mortgage insurance, which the lender will add to the monthly payment.

U.S. Department of Veterans Affairs

VA loans do not require a down payment, but they are only available to military members, veterans and their spouses. Your discharge reason and the length of time you spent in the military factor into your eligibility for the program.

U.S. Department of Agriculture

USDA loans do not have down payment requirements. However, the program is only available for homes in approved rural or suburban areas, and borrowers must meet income requirements to qualify.

Calculating Your Down Payment

To calculate the down payment you need to purchase a specific home, multiply the sales price by the down payment requirement of the mortgage you plan to use. For example, if you want to buy a home that sells for $450,000 with a conventional mortgage that has a down payment requirement of 5%, your minimum down payment is $450,000 x 0.05 = $22,500.

Deciding How Much To Put Down

Down payment requirements establish the minimum amount you must put up front on a home purchase. However, you can choose to make a larger down payment.

Benefits of a Larger Down Payment

Larger down payments can save you money on the purchase of your home.

Private Mortgage Insurance

Private mortgage insurance on a conventional loan usually costs 0.5% to 1% of your mortgage amount per year. If you must purchase private mortgage insurance on a $450,000 loan with a down payment of less than 20%, increasing your down payment to 20% or more could save you $2,250 to $4,500 per year. However, many lenders will allow you to stop paying for PMI when you reach 20% equity in your home, so factor this into your calculation.

Lower Monthly Payments

Down payment requirements reduce the total amount of money you are borrowing to purchase a home. The less money you borrow, the less you must pay back in both principal and interest. This translates to lower monthly payments.

For example, if you purchase a home that costs $450,000 with a 30-year fixed rate mortgage at 6% interest, your monthly payment for principal and interest with a 5% down payment is $2,563. At 10%, this goes down to $2,428 and at 20%, it is $2,158.

Lower Interest Costs

Generally speaking, the larger your donwpayment, the lower your interest rate will be. Making a down payment that exceeds the minimum down payment requirements reduces the total cost of your loan. The higher the interest rate on your loan, the more you can benefit from making a larger down payment.

In the above example, you would pay $495,208 in total interest with a down payment of 5%. At 10%, your total interest is $469,145 and at 20%, it is $417,017.

Disadvantages of Larger Down Payments

Saving up for a large down payment can be difficult for some homebuyers. If you deplete your savings too much to come up with a larger down payment, you could risk financial disaster if you were to lose your job or encounter a large expense, such as a major home repair or medical bill. This could damage your credit, lead to bankruptcy and even cost you your home if you are unable to make your mortgage payments.

Learning More About Down Payment Requirements

If you are unsure about which down payment requirements make the most sense for your financial situation, it may help to talk to a financial advisor or mortgage professional. Explore your down payment options at FHA Connection. You will find a wealth of information about down payment assistance and other home buying topics.