Think You Have Enough for a Down Payment? Why You Might Be Wrong and What To Do

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Affordability is one of the biggest challenges homebuyers face, partly because high home prices force most buyers to make large down payments. But that’s not the only out-of-pocket cost when you buy a home.

Unless you’ve also saved enough to cover closing expenses, your down payment might fall short of your total cash requirements.

How Much Down Payment Do You Need To Buy a Home?

The minimum down payment needed to buy a home depends on the loan type:

• Conventional: 5% (3% for some programs for lower-income borrowers)
• FHA: 3.5% with a credit score of 580 or higher; 10% with a credit score of 500 to 579
• VHA: None required
• USDA: None required 

Even if you have enough down payment for your loan, you might fall short once you’ve factored in other costs.

Closing Costs Add Thousands of Dollars to Your Purchase Price

Closing costs usually amount to 2% to 6% of your loan amount. To see how that affects the cash you need to buy, say you set a budget of $350,000 for your purchase, and you save up a $17,500 (5%) down payment. You’re good to go, right? Unfortunately, no. 

Your loan amount will be $332,500. Add 2% to 6% of that amount for closing costs, and you’re short anywhere from $6,500 to $19,950.

Here are some of the closing costs and prepaid expenses you might pay at closing:

• Fees related to the deed transfer
• Title search and the lender’s title insurance
• Transfer tax
• Homeowners insurance and property tax escrows
• Mortgage insurance
• Mortgage application and origination fees
• Mortgage points (prepaid interest)

What To Do If You Don’t Have Enough Saved

If you’re gearing up to buy and realize you don’t have enough cash, you have several options for making up the shortfall.

• Save up more money. You’ll be in a better position to buy, and the larger down payment could get you a lower mortgage rate.
• Use gift money from a family member. Most loan types allow gifts, but you might need a letter explaining that the money is a gift and not a loan.
• Apply for down payment assistance. Some lenders and many states and counties have down payment assistance programs that provide grants or payment-free loans that are automatically forgiven after you’ve lived in the home for a certain period. Fannie Mae offers a free tool to help you find these programs.
• Ask for a seller concession. A seller concession is an indirect way for the seller to contribute to your closing costs or prepaid expenses. They agree to have the costs taken from their sale proceeds, so while they net less from the sale, your loan amount and purchase price are unaffected.

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