This is one of the most common questions I get when talking to home buyers. I recently learned from my preferred lender that they work with over 150 loan products. The down payment options vary greatly between these programs, and a home can be purchased from 0% down to 100% cash. With so many available programs and personal variables, one size can’t possibly fit all. The simple (and very lawyerly) answer to how much someone should put down on a house is: it depends. Here are some factors that will impact how much you can and should put down on your next purchase:
Location, Location, Location
You’ve probably heard that this is the “golden rule” in real estate. While location isn’t the end-all-be-all on the financing side, it can affect how much you will be required to put down.
For example, there are conforming loan limits for agency debt, which varies by location. Once you cross that threshold amount, you are in “jumbo” loan territory where most lenders will require a larger down payment. Similarly, the USDA (yup, the meat certifying agency) has a 0% down loan program. However, the USDA has geographic eligibility requirements—usually suburban and rural areas.
Thus, the location of the property you are looking for can qualify you for certain loan programs, which in turn, can affect how much you will be required to put as a down payment.
The property you are looking to purchase may determine which loan programs are available. Let’s say you’re looking to use a FHA or VA loan, which have low and no money down options. If you’re looking at condos or townhomes, you will be limited to communities that have been approved under these programs. Likewise, many government loan and down payment assistance programs place a ceiling on the purchase price and require minimum standards on the condition of the property.
The type and purpose of the property will also influence your down payment options. You can get away with puttting less down on a property you plan to live in compared to an investment property. Residential investment properties usually require 20% down. If you’re looking to go bigger (5+ units), you should prepare to put 25% to 30% down.
A lender is ultimately trying to decide whether the borrower can repay the loan, and what kinds of safeguards to put in place, in case the borrower defaults. Your financial situation plays a big role in how much you will be required to put down. For instance, I used to constantly receive offers for 5% down conventional loans, when I had a steady W-2 job. But since I’ve become my own boss, I can’t qualify for conventional loans (due to lack of work history), and I usually need to put 20% or more down with private lenders.
An equally important question arises when you can put down more than what is required, but aren’t sure whether you should. Again, the answer depends. If you plan to just let the money sit in a savings account, earning nominal interest, it would probably be better for you to put more money down to decrease the principal balance and avoid paying interest on that amount. On the other hand, if you are able to deploy that capital and yield a return that is greater than the interest paid, that would be a better use of that capital. You also need to consider the tax implications (preferably with the help of a competent tax advisor) since real estate deductions vary depending on the type of property, use of property, and your income. At the end of the day, it is a deeply personal decision that boils down to your long-term goals, investment activities, and broader financial picture.
In sum, there are far too many factors that go into how much you can or should put down to give a generally applicable answer to this tough question. Your circumstances, the location of the property, and the property itself all play integral roles in this decision. This is why I always recommend that buyers sort out financing first—it is so important that it guides the remainder of your home search.
Contact me to discuss your options, and get set up with a solid lender.
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