How much should you put down on a house?
What is the average down payment for a house?
The median homebuyer typically puts down 13%. For buyers under 32, this drops to 8%, and certain mortgage programs even allow for down payments as low as 3% or none at all.
While putting down 20% to avoid mortgage insurance can be a smart choice if it’s affordable, it’s not always necessary. In fact, many people opt for a smaller down payment. In many cases, choosing a lower down payment rather than stretching to make a 20% down payment can be the more practical decision.
What does a down payment mean?
In real estate, a “down payment” refers to the cash you pay upfront when buying a home. The size of the down payment can vary and is usually shown as a percentage of the home’s purchase price. For instance, a 10% down payment on a $400,000 home would be $40,000. Likewise, if you put down $12,000 on that same home, your down payment would be 3%.
The term “down payment” exists because most first-time homebuyers don’t pay for their homes in cash. Instead, many finance their purchase with a mortgage loan. According to the National Association of Realtors’ 2023 Home Buyers and Sellers Generational Trends report, about 78% of all homebuyers used a mortgage loan to buy their homes.
While most mortgage loans require a down payment, certain government-backed loan programs allow buyers to purchase a home without making any down payment.
Is a 20% down payment required to buy a house?
Contrary to popular belief, a 20% down payment is not required to buy a home. While a 20% down payment on a conventional loan allows you to avoid mortgage insurance, it’s possible to purchase a home with a smaller down payment. According to the National Association of Realtors, the median down payment for first-time homebuyers in 2023 was 13%, and for buyers aged 23 to 41, the average down payment ranged from 8% to 10%.
This demonstrates that many buyers can purchase a home without needing to make a full 20% down payment.
Minimum down payment requirements
The minimum down payment amount varies depending on the mortgage program you apply for. Knowing how much you need for a down payment is essential in selecting the best mortgage option that suits your financial circumstances.
This is particularly important if you’re aiming to reduce your costs during the home buying process or are thinking about refinancing later on.
However, keep in mind that these down payment requirements are only the minimum. As a borrower, you have the option to put down more than the required amount. In some situations, it may be beneficial to exceed the minimum down payment.
Conventional Loans
Conventional loans generally require a minimum down payment of 3% to 5% for first-time homebuyers. Programs like Fannie Mae’s HomeReady and Freddie Mac’s Home Possible are tailored for first-time buyers and only require a 3% down payment.
Conventional loans come in two types: fixed-rate and adjustable-rate. Fixed-rate loans maintain the same interest rate throughout the life of the loan, ensuring consistent monthly payments. In contrast, adjustable-rate mortgages (ARMs) have interest rates that can change, offering potentially lower initial rates but carrying the risk of increases over time.
Conventional Loans Without PMI
To avoid private mortgage insurance (PMI) on a conventional loan, you typically need to make a down payment of 20% or more of the home’s purchase price. Lenders usually require PMI if the down payment is less than 20%, as it protects them against the risk of default.
As you pay down your loan and build equity, you can request the cancellation of PMI once you reach a certain level of equity. Lenders are obligated to cancel PMI when the loan-to-value (LTV) ratio drops to 78%, indicating you’ve gained enough equity in your home.
FHA Loans
FHA loans, insured by the Federal Housing Administration, are a popular option for first-time homebuyers due to their more flexible credit and income criteria.
- For borrowers with a credit score of 580 or higher, the minimum down payment for an FHA loan is 3.5%.
- If the borrower’s credit score is between 500 and 579, the minimum down payment increases to 10%.
FHA loans also require mortgage insurance premiums (MIP), which are generally paid for the life of the loan. This added expense can be substantial, prompting many borrowers to consider refinancing to a conventional loan once they have enough equity to eliminate the MIP.
VA Loans
VA loans, backed by the Department of Veterans Affairs, are available to eligible veterans, active-duty service members, and certain surviving spouses. One of the key benefits of this loan is that it doesn’t require a down payment, making it an appealing option for qualified first-time homebuyers.
In addition, VA loans do not require ongoing mortgage insurance, unlike many other loan types. However, they do require a one-time funding fee, which typically ranges from 1.4% to 3.6% of the loan amount.
USDA Loans
The U.S. Department of Agriculture (USDA) offers loans for eligible buyers in rural and suburban areas. USDA loans require no down payment, provided the borrower meets specific income and eligibility criteria. These loans are a great option for buyers seeking a home in designated rural areas who prefer not to make a large upfront payment.
Local First-Time Homebuyer Programs
Many states, counties, and cities offer first-time homebuyer programs that provide down payment assistance or low-interest loans. These programs typically have eligibility requirements, such as income limits or a mandatory homebuyer education course.
Jumbo Loans
Jumbo loans are mortgages that exceed the conforming loan limits set by the Federal Housing Finance Agency. Since these loans are larger, lenders typically require down payments of at least 10%.
Second Homes
A second home is a property you use in addition to your primary residence, such as a vacation home, weekend retreat, or property near your workplace. The minimum down payment for a second home is generally higher than for a primary residence, typically ranging from 10% to 20%. Lenders view second homes as riskier, as borrowers may be more likely to default on these properties during financial difficulties.
Investment Properties
Investment properties are purchased with the goal of generating income, either through rental payments, future resale, or both. Unlike second homes, these properties are not used for personal enjoyment but solely for income generation.
Down payments for investment properties are usually higher than for primary homes, typically at least 20%, due to the increased risk associated with rental properties. Loan options for investment properties also tend to have stricter qualifying requirements and higher interest rates than those for primary or second homes.
Advantages of a Larger Down Payment
While saving up for a larger down payment can take time, a zero- or low-down-payment loan may allow you to buy a home sooner. However, opting for a larger down payment comes with significant advantages.
Explore Your Down Payment Options
Check your down payment choices here (Nov 7th, 2024).
Lower Interest Rates
Lenders typically offer better interest rates to borrowers who make a larger down payment, as it reduces their risk by providing the borrower with more initial equity in the property.
Reduced Monthly Mortgage Payments
With a larger down payment, you’re financing a smaller portion of the home’s cost. This lowers your monthly mortgage payments, helping you manage monthly expenses more easily.
Avoiding Mortgage Insurance
By putting down 20% or more on a conventional loan, you can bypass private mortgage insurance (PMI), which lenders often require for smaller down payments. Avoiding PMI can save a substantial amount over the life of your loan.
Increased Home Equity
A larger down payment gives you more equity from the start, providing financial security and making it easier to refinance or sell the property in the future.
Lower Debt-to-Income (DTI) Ratio
A lower DTI can make it easier to secure additional credit in the future. Your DTI, or the portion of your monthly income that goes to debt, is a key metric for lenders. Putting more down reduces your loan amount and helps keep your DTI within the typical limit of 45%, making it easier to qualify for future loans or purchases.
Greater Appeal in a Competitive Market
In a seller’s market, a larger down payment can make your offer more attractive to sellers, demonstrating financial stability and increasing the likelihood of a smooth closing process.
Afford a More Expensive Home
A larger down payment can expand your purchasing power. For example, a buyer aiming for a $1,000 monthly mortgage payment could afford over $100,000 more in home value with a 20% down payment compared to a 3% down payment while keeping the same monthly cost.
Advantages of a Smaller Down Payment
Your home is likely to be one of your most valuable assets, potentially surpassing other investments in worth. Recognizing it as both a residence and a financial asset can guide smarter financial decisions. However, one of the riskiest choices some buyers make is putting down too much initially.
Enter the Market Sooner
With a smaller down payment, you may be able to buy a home sooner without needing to save a large sum. This can benefit first-time buyers or those with limited savings and may even allow for purchasing a larger or more conveniently located property.
Potential for Home Appreciation
Entering the market earlier with a smaller down payment could let you benefit from future property appreciation. As your home’s value rises, your equity increases, which may balance out the higher interest from a smaller down payment.
Funds Available for Home Improvements
Holding back some savings rather than putting everything toward a down payment can be beneficial. New homeowners often encounter unexpected repair and renovation costs, so having funds set aside can make homeownership less financially demanding.
Flexibility and Cash Reserves
A smaller down payment helps keep emergency funds available for unforeseen costs, providing financial security and reducing the need for additional debt in cases like job loss or medical expenses.
Higher Return on Investment
Conservative buyers may want to avoid overfunding the down payment, as it can limit their return on investment (ROI). For instance, if a $400,000 home appreciates by the national average of 5% per year, it will be worth $420,000 in a year, regardless of down payment size, generating $20,000 in appreciation.
The amount you put down can significantly impact your rate of return.
With a 20% down payment ($80,000), your rate of return is 25%. With a 3% down payment ($12,000), the rate of return jumps to 167%. That’s a substantial difference.
However, it’s essential to factor in the higher interest rate and the mandatory private mortgage insurance (PMI) that come with a conventional loan at 3% down. Loans with low down payments can mean higher monthly costs.
Assuming a 1.75% increase from rate and PMI combined, a low-down-payment borrower would pay an additional $6,780 annually. Even with this adjustment, the rate of return on a 3% down payment loan remains at 105%.
In general, the less you put down, the greater your potential return on investment.
How much should you put down on a home?
If it’s within your budget, making a 20% down payment is often a smart move. This way, you avoid private mortgage insurance, reduce your loan amount, and lower your monthly payments, potentially saving a significant amount over time.
However, there’s a trade-off. For many, a 20% down payment isn’t easy to manage, especially with recent rapid increases in home prices. How much you put down should consider more than just the sale price—it’s also about your overall financial picture.
If putting 20% down would exhaust your savings and leave you “house poor,” a smaller down payment might be the better option. This approach allows you to keep funds on hand for emergencies, maintenance, and new-home expenses like furniture and upgrades.
Ultimately, the ideal down payment amount depends on your finances. It might be 20%, but it could also be 10%, 3%, or even zero. It’s important to explore all your options and choose the down payment that best suits your situation.
Your real estate agent can offer valuable advice on down payment size by sharing insights on local market trends. Their expertise and relationships with mortgage brokers and lenders can also help you make a well-informed choice.
Down Payment Assistance Programs
While zero-down mortgages aren’t available to everyone, most homebuyers need at least 3% down for a conventional loan or 3.5% for an FHA loan. But what if you’re struggling to cover even the minimum down payment? For instance, a 3% down payment on a $300,000 home still adds up to $9,000, which can be a substantial sum.
Fortunately, there are grants and loan programs available to assist with down payments. Every state offers multiple down payment assistance programs (DPAs), typically funded by state and local governments or nonprofit organizations, to help make homeownership more attainable for lower-income or disadvantaged buyers.
These DPAs may provide funds as either grants or loans, with many loans forgiven if you stay in the home for a specified period. To determine your eligibility, consult your Realtor or lender, who can help you identify and apply for local programs.