The down payment for a house is a big decision for first-time home buyers.

It may seem straightforward: You pay a certain amount for a down payment, you pay your closing fees and you move into your new home.

However, the down payment amount holds a lot of weight. 

The down payment impacts the type of mortgage for which you qualify, how much a lender will loan you, what your monthly mortgage payments are and how much you pay in interest and fees over the life of the loan.

Let’s dig into how much a first-time home buyer should put down for a house, including some general loan and lender requirements, considerations and how to prepare.

How much does a first-time home buyer need to put down on a house?

The standard answer to “how much a down payment should be” used to be 20% of the home purchase price.

Today, this isn’t the case. Most loan programs accept a much lower down payment. (The downside: the requirement of mortgage insurance and a monthly payment for it.)

For many homebuyers—especially those buyers entering the market for the first time—this trade-off is worth it. 

As home prices rise, many first-timers simply can’t afford to put down anything close to 20%, and that’s okay.

The required down payment amount for first-time home buyers today depends on the type of loan. Some borrowers also qualify for down payment assistance.

Let’s take a look at some of the most common types of loans and the general down payment requirements for each.

Conventional loan

Conventional loans follow the requirements of Fannie Mae and Freddie Mac, government-sponsored enterprises which buy and sell most U.S. mortgages.

Fannie Mae and Freddie Mac require a down payment of 3% for borrowers who have a good credit score.

Credit score limits vary from lender to lender. Here at Compass Mortgage, we require a minimum credit score of 620 and a debt-to-income ratio (DTI) at or below 50%.

Calculate your DTI by dividing your monthly debt payments by your monthly gross income.

FHA loan

FHA loans are insured by the Federal Housing Administration, an agency of the federal government.

This type of loan is particularly popular with first-time home buyers because of the allowance for a lower credit score. Since FHA loans are backed by the government, lenders can take more risk by allowing lower scores.

FHA loans accept down payments as low as 3.5%, with credit scores of 580 or higher in most cases. As with conventional loans, DTI usually should be at or below 50%.

FHA loans also require additional property standards which are established by the U.S. Department of Housing and Urban Development.

VA loans and USDA loans

VA and USDA loans offer wonderful benefits to those who qualify, and 0% down is one of the advantages.

VA loans are backed by the U.S. Department of Veterans affairs and are available only to veterans, active-duty military and their spouses.

USDA loans are secured by the U.S. Department of Agriculture and are available only to low-income households in eligible rural areas.

Find out if you qualify for either of these loan programs by contacting any of our loan officers at Compass Mortgage.

Jumbo loans

Jumbo loans are considered non-conforming conventional loans (meaning that these loans don’t meet Fannie Mae or Freddie Mac standards), and they are used to finance properties that are too expensive for conventional conforming loans.

They are considered higher-risk to the select lenders that offer them, so higher credit scores and down payments of anywhere from 10% to 20% are required.

Loan requirements for the first-time homebuyer

First-time homebuyers have several considerations.

The most helpful first step for any potential buyer is to find a trusted, experienced lender and get preapproved for a mortgage loan.

Getting preapproved for a mortgage is helpful in several ways. 

First, you’ll fill out an application and answer a series of questions about your estimated down payment, employment, income and debt.

Based on your answers, the lender will provide you with the maximum loan amount for which you qualify, as well as the terms and conditions of the loan.

This figure can help you objectively assess your financial situation and whether you need to take a step back and continue saving before you purchase a home.

Generally, first-time homebuyers need a good credit score, a low DTI and enough funds to cover an adequate down payment, closing costs and fees, as well as extra savings for unexpected homeowner costs.

Can you use a gift for a down payment?

Most loans allow gift money for a down payment, but requirements vary regarding the source of the gift.

Lenders usually require a gift letter to establish the origin of the gift, in addition to a statement that it doesn’t need to be repaid.

Can you use your retirement account for a down payment?

First-time homebuyers can borrow or withdraw funds from their retirement accounts to use as a down payment but usually face penalties and missed tax advantages.

If you’d like to withdraw resources from your retirement account for the down payment, it’s best to consult first with a financial advisor to weigh the full pros and cons for your situation.

Be prepared to buy your first home: Get preapproved with Compass Mortgage

Buying your first home doesn’t have to be a stressful experience, but preparation is the key to avoiding possible anxiety.

When first-time buyers know what to expect and what their financial situation should look like, the whole lending process can be a lot smoother.

Even if you’re not quite ready to buy a home, it’s worth it to get preapproved for a loan now to gauge your financial picture and help you make meaningful improvements in your financial situation.

Preapprovals do expire after a certain timeframe; but once you’re truly ready to begin the house search, you can apply again.

Take a giant step beyond mere preapproval by obtaining a loan commitment through Compass Mortgage’s Get Committed® program! Ask any of our loan officers about this better-than-cash advantage.

Get the process started today with the lending experts at Compass Mortgage. We think you’ll love our simple, personalized loan process, and our team of caring, genuine professionals who want you to succeed.

Photo by Ketut Subiyanto