Home down payments can be a significant expense for a first-time buyer, who might not be able to pay as much towards a down payment as someone who already owns a home and is able to sell it in order to finance the purchase of their next home. This can put first-time home buyers at a disadvantage in the home-buying market and raise important questions as they struggle to put together the money necessary to make the down payment on a home.

How much should I put down on a house in Nashville TN? Are there alternatives for those who can't afford the traditional 20% down payment requirement? Is a down payment required when buying a home? How much do down payment requirements vary from lender to lender?

With the answers to these questions, prospective home buyers will have a better idea of how much money they need to save for a down payment and how they might be able to purchase a home despite a lack of funds.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.

Why Are Down Payments Required?

Since most people cannot afford to buy homes entirely in cash, many are required to choose a mortgage instead, and thus a submit down payment, in order to finance a home.

Can you buy a house with no down payment? Yes, if you qualify for certain types of loans. However, lenders often worry about borrowers who get the money with little to no personal investment in the purchase. Even though a mortgage is a legally binding document with serious repercussions for mortgage default, lenders often find that someone who has personally invested their own money into the property in order to buy it will be more likely to make mortgage payments on time. That initial investment is known as the down payment.

What Is the Standard Down Payment?

There are multiple opinions on what qualifies as a "standard" down payment. Though widespread belief holds that a 20% down payment is the norm, the truth is that mortgage lenders can set their own down payment requirements. More than a decade ago, it may have been possible to find lenders who were willing to open mortgages with no down payment at all—and there are still a few ways to buy a house with no money down. After the 2008 housing crisis, however, lenders tightened their lending standards.

These days, expect lenders to request a down payment of 10% to 20% of the loan's value, with a handful of exceptions.

The down payment does not include closing costs, discount points (paying money upfront, often several thousand dollars, in exchange for a lower interest rate), moving expenses, or anything that has to be done to the home before you can move in, such as deep cleaning or repairs.

Why is Putting 20% Down on a House Recommended?

There are all sorts of obstacles that you have to deal with when you find yourself in the market for purchasing a new home. Affordability is cited as one of the top reasons new buyers struggle to enter the real estate market, and, of course, more expensive homes and bigger loans require more money down. Around 40% of non-homeowners cite down payment and closing costs—the upfront expenses in a home transaction—as one of their biggest obstacles to homeownership.

With these difficulties, one would expect the advice to be “pay as little down payment as possible.” So why do experts advise paying 20% down, if at all possible?

Increased Chance of Getting a Mortgage

When you’re getting a mortgage, it’s all about showing the lender that you’re a low-risk investment. The more confident the lender is that you’ll make your payments on time, the more willing they’ll be to lend you money. Proving that you’re financially stable with a big down payment can increase your chances of approval.

Lower Mortgage Interest Rates

When you make a bigger down payment, you have more equity in your home right from the start—in other words, your loan-to-value ratio is lower. Having a lower LTV makes your loan appear less risky to your lender, which may qualify you for lower interest rates.

Interest rates are how banks make money by giving loans. If you have a high LTV, the bank is taking a greater risk that they’ll lose money to a mortgage default, so they compensate by increasing the interest rate.

Smaller Mortgage Payments

Everyone likes smaller bills, right? The more money you put as a down payment, the smaller your mortgage payment is going to be every month. This is because the more money you use to buy a house, the less money you have to borrow—but your mortgage term is still the same 15 or 30 years, depending on the mortgage product.

Greater Initial Equity

Having more equity upfront increases your chances of approval and low interest rates, but it’s also an important consideration for your future plans. If you foresee a possible need to refinance or sell your home in a few years, having more equity now can affect your ability to do so.

In general, lenders won’t agree to a cash-out refinance if you don’t have at least 20% equity in your home; if you have less than 20% equity, you might have to accept a higher interest rate or mortgage insurance in order to refinance.

No Need for Private Mortgage Insurance

While you can get a loan with a down payment under 20%, it comes with a catch: private mortgage insurance (PMI). This insurance protects the lender in case you default on the loan, enabling the lender to accept more risk.

You’ll pay PMI as part of your mortgage payments until you reach 20% home equity, after which you can apply to get rid of it. There are a few things to note:

• Some lenders have a minimum time period for PMI, regardless of your equity
• FHA loans require you to refinance to end Mortgage Insurance Premium (MIP, an equivalent to PMI)
• If you pay at least 10% down on an FHA loan, you might only pay MIP for the first 11 years of the loan. Otherwise, it’s for the life of the loan.
• PMI may automatically end at 22% equity, but you can request to have it removed at 20% 
• PMI is until you reach 20% home equity, not 20% loan value
• If your home value rises, you may be able to end PMI early, as you’ll automatically gain equity.

Even if you can’t afford a full 20% down payment, every percentage closer you get means less PMI you’ll have to pay.

Lower Overall Cost

Lower loan balance, lower interest rates, and lower PMI add up to an overall lower cost for your new home. Here’s a quick example using an online mortgage calculator:

*Roughly the average home value in Tennessee, rounded for simplified calculations

**As with interest rates, PMI rates will vary depending on factors like credit score. This example assumes a credit score of 720 and uses an average premium from The Urban Institute's Housing Finance Policy Center

***This example does not include property taxes, which are often rolled into mortgage payments, or other expenses such as HOA fees or home insurance

Are There Options for First-Time Home Buyers?

Even with the long-term benefits, paying 10% to 20% down in cash can be a difficult prospect for first-time home buyers. People who already own a home can sell their current homes and use the profits from the sale to make a sizable down payment on a new home without having to save up for it. First-time home buyers must use other means. As a result, many lenders offer loan programs targeted primarily at first-time home buyers, which require a much smaller down payment.

How much will your house payment be? Loans guaranteed by the Federal Housing Administration (FHA) may have down payments as low as 3.5%. Loans conforming to the standards of Fannie Mae and Freddie Mac could allow first-time home buyers to make a 3% down payment if they qualify.

First-Time Homebuyer Down Payment Assistance in Tennessee

There are a number of down payment assistance programs aimed at first-time homebuyers, both at state and local levels. Be sure to check for assistance programs in your local area.

The Tennessee Housing Development Agency offers up to $15,000 in down payment assistance through the Great Choice Home Loan. There are two options for how you can receive this assistance loan:

• $6,000 with a 0% interest rate; loan is forgiven at the end of the 30-year term, or due in full if you sell or refinance
• Up to 5% of the home sale price to a maximum of $15,000 with a 0% interest rate; amortizes over a 30-year term

This THDA loan has county-specific maximum income requirements as well as a 640 minimum credit score. It's typically insured by the FHA or USDA, so it may also have a down payment as low as 3.5%.

The Housing Fund also offers down payment assistance throughout Tennessee. If you meet the requirements and contribute at least 1% of the purchase price toward the home, you may be eligible for a loan of up to $35,000 in down payment assistance.

In addition, many first-time buyers receive assistance from friends or family members. Money gifted to you can be used toward down payments and closing costs, but it has certain documentation requirements. Ask your lender to be sure, but in general, down payment gifts require you to have a letter from the gifter that clearly states that there's no expectation of repayment. Lenders require this to better understand where your funds are coming from and your debt-to-income situation.

Loan Options With Low Down Payment Requirements

If a homeowner cannot make the requirements of a typical down payment on a house through a conventional loan, other loan programs exist through which buyers may still be able to finance a home purchase. Many of these loan programs offer reduced down payment requirements to help prospective homeowners get into a new Nashville home. These loan options include the UDSA loan, the FHA loan, and the VA loan, all of which offer low or reduced down payment requirements for home buyers.

The USDA Home Loan

USDA home loans are loans guaranteed by the United States Department of Agriculture and are intended to help low-income families purchase homes in rural communities. USDA loans require zero money down towards the cost of the home, and they also offer lower credit score and income requirements, making it much easier for first-time buyers to qualify. 

Because the loan is guaranteed up to a percentage of the home's cost by the Department of Agriculture, lenders are able to offer better terms for any applicants who qualify. However, USDA loans have strict requirements for applicants. For a buyer to qualify for a USDA Guaranteed loan, they must:

• Be purchasing in a USDA Eligibility Area
• Meet location-dependent maximum income requirements
• Be purchasing the home as a primary residence
• Be a U.S. Citizen, U.S. non-citizen national or Qualified Alien

These loans can also be used to build a new home or improve an existing home. If homeowners do not meet the requirements for a USDA loan, they may still consider the FHA and VA loan options.

The FHA Home Loan

FHA home loans are similar to the USDA loan in that a percentage of the loan amount is guaranteed by the Federal Housing Administration. This means that if a homeowner stopped making payments on the home, the Fair Housing Administration would pay the lender a portion of the home's cost, ensuring that they haven’t lost as much money. This guarantee enables lenders to be less stringent with their lending requirements for homeowners in terms of credit score, debt-to-income ratio, and down payment.

The FHA loan program allows homebuyers to make down payments as low as 3.5% in exchange for paying Mortgage Insurance Premium (MIP) over the life of the loan. This lower down payment enables homeowners to pay their down payment more easily when they find a house that suits their needs.

To qualify for an FHA loan, applicants must:

• Have a FICO score of at least 580 for a 3.5% down payment
• Have a FICO score of at least 500 for a 10% down payment
• Have a debt-to-income ratio of less than 43%
• Be purchasing a primary residence
• Have proof of income and employment
• Pay mortgage insurance

While FHA loans are most popular with first-time homebuyers, you’re not required to be a first-time homebuyer to apply for one.

The VA Home Loan

Originating as a part of the GA Bill of Rights in 1944, the VA home loan program allows veterans and active service members to apply for home loans with more lenient requirements, both to help ease their transition back into society and to thank them for their service. VA loans do not require any money down for the loan, offer lower interest rates, have caps on closing costs, and are guaranteed by the Department of Veteran Affairs. To qualify for a VA loan, applicants must:

• Serve in active duty with a discharge other than dishonorable
• Meet active-duty service requirements based on enlistment date; these differ for National Guard and Reserve members 
• Be purchasing a home to be occupied by themselves, a spouse, and/or a dependent
• Meet the lender’s credit and income loan requirements

Applicants must acquire a Certificate of Eligibility (COE) and pay a VA funding fee in order to utilize the VA loan program, but the fee may be waived if the applicant is disabled or deceased. (Surviving spouses of veterans can acquire a COE.)

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.

How Much Should I Put Down?

Although many people will say to put down as little as possible, it's important to weigh all the options. Keep in mind that any loan with a down payment of less than 20% will likely require private mortgage insurance (PMI), which is an additional expense that could add up to $100 or more to your monthly mortgage payment. However, a smaller down payment also frees up more funds for closing costs, moving expenses, home warranties, and improvements needed in the home in the first few years of ownership. Keeping at least a few thousand dollars available after you move in is a wise move, if you can manage it.

Making that first down payment is often one of the hardest parts of homeownership for a first-time home buyer. Sometimes, a low down payment is what's needed in order to buy a home at all. With these tips, it's possible to secure a lower down payment on a mortgage loan.