How Much Do We Need as a Down Payment to Buy a Home?

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A reader asks: "I am confused about the down payment we need to buy a home. My boyfriend and I have been saving to buy a home. So far, we have about $2,000 in the bank. Some of our friends say we should put up a down payment that is at least 3% of the sales price. For a $200,000 home, that's $6,000 for a down payment, and that seems like not enough money. How much are we required to put down to buy a home? What is the minimum down payment we need for home buying?"

It's admirable that the two of you are saving up for a down payment to buy a home. Some couples, especially in California, simply go driving around on a Sunday, spot an open house, stumble inside and end up making an offer without giving home buying a second thought. Putting your finances in order and making sure you have enough of a down payment saved, plus closing costs is smart.

Is an Earnest Money Deposit the Same as a Down Payment?

For starters, I'd say that you are confusing a down payment with an earnest money deposit. A down payment is a percentage of the sales price that a home buyer pays out of pocket. Some lucky home buyers can ask mom and dad for a down payment. The balance of the purchase price after a down payment is deducted is the amount of your mortgage.

An earnest money deposit is the amount of money paid to secure a purchase contract. It is part of your down payment and is generally dictated by local home buying customs. The earnest money deposit can vary from a small amount such as $100 or $500 to a larger amount such as $1,000 to $50,000, depending on the sales price.

Earnest money is generally 1 percent to 3 percent of the sales price. It is money that can be at risk if a buyer defaults on the contract, known as liquidated damages. It shows you have good faith intentions to buy the home.

In multiple-offer situations, buyers who put down a larger earnest money deposit often gain an advantage. Even though it's all the same money in the end to the seller, sellers often see a big earnest money deposit as a sign the buyer is committed and serious.

Types of Minimum Down Payments

The amount of minimum down payment required will depend on the type of loan that you choose. Each mortgage loan type carries its own guidelines. Gone are the days of 80 / 20 combo loans and liar loans, also known as stated income loans. Today, underwriters closely scrutinize a borrower's ability to repay the loan. They don't want borrowers to overextend themselves and end up in foreclosure or a short sale down the road.

  • Minimum Down Payment for a VA Loan: A VA loan, created by the government in 1944, is one of the best deals going in America. It offers competitive rates and attractive terms to past and present military members of our armed services. The best thing about a VA loan? No down payment. That's right. Zero down to qualified vets.
  • Minimum Down Payment for an FHA Loan: Another government program, the FHA loan, has been around even longer than the VA loan program. FHA loans have been part of the American mortgage system since 1934. The minimum down payment requirement for an FHA loan is 3.5 percent. For a $100,000 sales price, the minimum down payment is $3,500. There is also an MI premium that can be folded into the loan.
  • Minimum Down Payment for a Conventional Loan: Most conventional loans are fixed-rate mortgages. These types of loans have offered flexible down payment plans in the past, but the push for the future is to increase the down payment minimums. While 100 percent loans are not available, typically you can find, with a high enough FICO score, a loan for a 3 percent down payment. Some special conventional loans for certain classes of professional people such as teachers, for example, can require zero down.
    • There are also 10 percent down payment and 15 percent down payment loans. All 3 of these types of loans involve PMI. As time goes on, the push will be for a minimum 20 percent down payment. With 20 percent down, there is no PMI.

    Conventional wisdom says you should put down as much as you feel comfortable putting down to buy a home. Generally, more is better than less. But don't wipe out your savings account to do it. You will still need to have funds set aside for a rainy day and for things to buy after buying a home.

    At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.