A deposit is the money you pay in advance to make a large purchase, such as a car or house, and is expressed as a percentage of the price. A 10% deposit for a $350,000 house would be $35,000.When you apply for a mortgage to buy a house, the first payment is your contribution to the purchase and represents your initial interest in owning the house. The lender provides the rest of the money for the purchase of the property.
Lenders require a down payment for most mortgages. However, there are exceptions such as VA and USDA loans which are guaranteed by the federal government and generally do not require a down payment.
VA loan guaranteed by the United States Department of Veterans Affairs. The United States generally does not require a deposit. VA loans are intended for current members of the military, as well as eligible veterans and surviving spouses.
There is also no down payment requirement for USDA loans supported by the US Department of Agriculture’s rural development program. The USDA loans are for buyers of rural and suburban homes who meet the program’s income limits and other requirements.
Certain conventional mortgages, such as the possible mortgages of Fannie Mae HomeReady and Freddie Mac Home, only require a deposit of 3%. Traditional loans are not supported by the government, but follow the down payment guidelines set by government-sponsored companies Fannie Mae and Freddie Mac.
Down payment requests may also vary depending on the lender and the borrower’s credit rating. For example, the minimum down payment for an FHA loan is only 3.5% with a credit rating of 580 or more, the minimum down payment of 10% with a credit rating of 500 to 579.
Benefits of a larger down payment
Saving money takes time, so a zero or weak deposit can speed up your ability to buy a home. However, a larger deposit has the following advantages:
- A better mortgage rate.
- Lower initial and ongoing costs.
- More equity in your home from the start.
- A lower monthly mortgage payment.
A lower down payment makes the loan an increased risk in the eyes of the lender. Government-supported mortgage programs such as FHA, VA and USDA loans reduce risk by guaranteeing some of the loans. If a borrower defaults on one of these loans, the partner government agency reimburses the lender for what it owes. However, depending on the program, you pay the guarantee through interest rates or mortgage insurance. With traditional mortgages, you usually have to take out private mortgage insurance if you pay less than 20%.