Consumer Tips

The Lowdown on Down Payments

Wells Fargo Home Mortgage

April 8, 2021

How does a down payment work?

A down payment is an upfront payment toward the total cost of a home you plan to buy. You typically pay a percentage of the home’s cost, with the mortgage you get making up the difference. For example, if you put down 20% on a $400,000 home ($80,000), you would get a mortgage to finance the remaining $320,000.

If you’ve stashed away some cash for your down payment, great. But make sure you set a realistic budget when considering how much to put down.

Why your down payment amount matters

• It's one of the factors in lending decisions. Your lender will consider your down payment along with your credit score, credit history, total debt, and annual income to see if you qualify for a loan.
• The size of your down payment can affect your mortgage options. What you put down on your home can affect what financing options and interest rates you’re offered.
• The more you put down, the less you may pay in interest. Because you’re borrowing less money, a larger down payment may reduce the interest you pay over the life of your loan and lower your total mortgage costs. Plus, your monthly payment may be lower.

Mortgage options for low down payments

You don’t have to put down 20% to get a mortgage. The following are common types of loans that offer low down payment options.

• Conventional loans: First-time homebuyers might qualify for a down payment of just 3% of the purchase price.
• VA loans: If you qualify for this loan, which is backed by the Department of Veterans Affairs, you won’t be required to make a down payment at all.
• USDA loans: If you qualify for a loan backed by the U.S. Department of Agriculture, your down payment could be 0%.
• FHA loans: First-time homebuyers might qualify for a down payment as low as 3.5% of the purchase price.

But, if you do choose make a lower down payment, you may have to pay mortgage insurance. This insurance provides protection for the lender in the event you are unable to make mortgage payments. Mortgage insurance increases the cost of the loan and will increase your monthly payments.

It's also a good idea to keep a little cash handy. After you pay all closing costs, most lenders want you to have enough money left in savings to cover your mortgage payments for a few months. You might also want to have some cash set aside for any unexpected expenses that might come up after you move into your new home.

There are many types of mortgages with different down payment requirements available. The down payment that’s right for you is the one that fits your budget and loan selection. Your Wells Fargo Home Mortgage consultant can help you understand your options so you can make informed decisions.