The percentage down payment needed for first-time buyers

Reader question: “We are planning to buy our first home in the fall of 2017. We don’t have that much saved up for a down payment yet. What percentage down payment is needed for first-time home buyers in 2017?”

The minimum down payment may vary depending on what type of home loan you are using, and other factors. The fact that you’re a first-time home buyer does not mandate a specific down payment percentage.

Some first-time buyers choose to put down 20% or more in order to avoid mortgage insurance. But most put down less than that, simply because they don’t have enough saved up for a larger down payment.

Depending on your qualifications, you might be able to put down as little as 3% of the purchase price. Additionally, first-time home buyers who are also military members can use a VA loan to finance 100% of the purchase price.

Down Payment Percentage Options for First-Time Buyers

Here’s some more information about the percentage of down payment for first-time home buyers, based on the different types of loans:

Conventional — A conventional home loan is one that is not insured by the government. This distinguishes it from the FHA and VA home loans mentioned below. For many years, the minimum percentage of down payment on a conventional loan was 5%. This was true for first-time and repeat home buyers alike. But starting in 2015, an increasing number of 3% down payment mortgage products have come onto the market. That’s because Freddie Mac and Fannie Mae (the government-sponsored corporations that buy mortgage loans in the secondary market) now support home loans with 97% financing.

Federal Housing Administration — FHA home loans are one of the most popular financing options for first-time home buyers. This is largely due to the low percentage of down payment that’s required. Eligible borrowers who use an FHA loan to buy a house could put down as little as 3.5% of the purchase price or the appraised value, whichever is less. FHA loans are not limited to first-time buyers, but they are particularly popular among this group.

VA / military home loans — The down payment percentage for first-time home buyers who happen to be military members can actually be zero, when a VA loan is used. For military members and veterans, it’s really hard to beat this program. It offers 100% financing for no down payment whatsoever. Eligible borrowers can often avoid mortgage insurance as well, which is usually required with high LTV loans. So there’s a lot to like about the VA program.

Credit unions — These days, a lot of credit unions are offering 100% mortgage loans to their members. This eliminates the need for a down payment altogether. There are way too many credit union programs to list here. My advice is to do a Google search for credit unions in your area that offer low or no down payment percentage for first-time home buyers.

Mortgage Insurance Might Be Required

First-time home buyers seeking a low down payment financing option need to be aware of mortgage insurance. Generally speaking, when you have a home loan that accounts for more than 80% of the property value, some form of mortgage insurance is required.

Because this is typically “rolled into” the loan, it increases the size of your monthly payments. So it’s an important consideration.

There is government mortgage insurance applied to FHA loans with a 3.5% down payment, and there is private mortgage insurance for conventional home loans with lower down payment percentages.

First-time home buyers often view mortgage insurance in a negative light. But it offers a pretty big advantage. Without this kind of insurance, most borrowers would be required to make down payments of 20% or more, in order to reduce the risk to the lender. This would put homeownership out of reach for a lot of people. It would also require you to wait longer to purchase a home, in order to save up the required down payment percentage.

But with mortgage insurance, home buyers can purchase a house sooner and with less money down. So it’s not necessarily a bad thing.