How Much Is a Down Payment for a House?
Buying a home is exciting whether you’re a first-time homebuyer, upgrading to a larger space or downsizing. Still, the process can seem overwhelming and complex, especially if you’ve just started looking at homes for sale. Determining your down payment amount (and the factors that impact how much your down payment will be) will help you avoid financial mistakes and get the most out of your purchase.
What Is a Down Payment?
A down payment is the initial upfront payment for the purchase of your home, and it’s a requirement for most mortgages. After you make your down payment, your loan balance will be spread into manageable monthly mortgage payments, typically for 15 or 30 years. Factors to consider when determining your down payment include your financial situation, loan options and mortgage insurance.
How Much Should You Put Down on a House?
The amount of the down payment you put down depends on the purchase price of your home and your home loan program. Different mortgage loans require different percentages, and factors like your debt-to-income ratio, credit score, and the loan-to-value ratio of the house are three of the top factors that mortgage lenders consider when deciding to extend credit to a homebuyer.
According to the National Association of Realtors® (NAR) 2023 Profile of Home Buyers and Sellers Report, the typical down payment for first-time buyers is 8%, the highest since 1997. For repeat buyers, the typical down payment was 19%. The report also showed that to secure their down payments, many first-time buyers increased reliance on financial assets. This included tapping into investments such as their stocks and bonds, as well as cryptocurrency, IRAs and their 401K or pension programs.
Do You Need to Put 20% Down on a House?
No, in most cases you can put as little as 3% down if you’re financing with a conventional loan. Traditionally, 20% was the standard down payment for a house. And while many homebuyers still put that much down, 20% is only the threshold lenders use for requiring private mortgage insurance (PMI) on a conventional loan. The average down payment is much less today, so you don’t have to put 20% down if you don’t want to or if it isn’t in your best interest, financially. There are benefits and drawbacks to both sides of the coin, and by weighing the two, you can better decide what’s right for you.
Pros and Cons of Putting 20% Down on a House
Pros:
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- Eliminates private mortgage insurance: Avoid paying this extra cost with a larger down payment.
- Secure lower interest rate: With a 20% down payment, you can often negotiate a more favorable mortgage rate with your lender.
- Reduced monthly payments: A more significant downpayment means you’re borrowing less overall, so your monthly payment will be more manageable.
- Leverage in a competitive market: The housing market can be competitive, and many markets have more buyers than inventory. By making a more substantial down payment, you will likely have the upper hand in a bidding war.
Cons:
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- Delayed homeownership: Saving for a down payment of 20% can be a slow, lengthy process. Sometimes it takes years to save up enough money.
- Could drain savings: Putting this large chunk of change down leaves you vulnerable in the event of emergency expenses or money you’ve saved for your other financial goals.
- Less Money for Home-buying Expenses: Stretching to make a bigger down payment could tap into the money that you’d use for home improvements, repairs or large expenses like furniture.
Does Your Credit Score Impact Your Down Payment?
Yes. Your credit score directly affects which loan program you qualify for and the interest rate on your loan. It can also impact the size of the down payment a lender will require. Lower credit scores limit how much money you can borrow and could lead to higher interest rates. Before beginning the home-buying process, check your credit report to get a clear picture of your financial standing. Ensure any information reported by lenders or creditors is accurate and current.
Loan Types and Minimum Down Payment Requirements
Your down payment will depend on the type of mortgage you plan to apply for when you buy a home. Below are the types of loans and the minimum down payment required to help you determine which home loan is the right fit for your needs and the type of home you can afford. If you’re looking through listings on homes.com, each one includes a mortgage payment calculator to help you determine your monthly payments.
Down Payment Requirements by Loan Type:
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- Conventional loan: 3%
- FHA loan: 3.5%
- Jumbo loan: 5-10%
- VA loan: 0%
- USDA loan: 0%
Conventional Mortgages
The most common and most popular type of mortgage is the conventional home loan. As mentioned above, you can purchase a home with as little as 3% down if you opt for a conventional mortgage. You also need a credit score of at least 620. With a conventional loan, a down payment of less than 20% means you will need to purchase private mortgage insurance.
With a conventional loan, you can choose between a fixed-rate or an adjustable-rate mortgage (ARM). The main difference is that you will lock into a specific interest rate for the entire loan length with a fixed-rate mortgage. An ARM will have a low introductory interest rate for an initial period, typically the first three to 10 years. After that, the interest rate will vary based on the index rate (the interest rate that lenders use for ARMs) and any additional percentage points that are outlined in your loan.
FHA Loans
FHA Loans are fixed-rate mortgages that are insured by the Federal Housing Administration. These loans are perfect for first-time homebuyers whose credit scores would keep them from qualifying for a conventional loan. Buyers with a credit score of 580 or above can qualify for an FHA loan with as little as a 3.5% down payment. If your credit score is between 500 and 579, you can still secure an FHA mortgage with a down payment of 10%.
VA and USDA Loans
A VA loan is insured by the Department of Veterans Affairs and a USDA loan is backed by the United States of Agriculture. Both loans can allow you to purchase a home with zero money down. To qualify for a USDA loan, you must meet specific income criteria and buy a house in an eligible suburban or rural area. To qualify for the VA loan, you must be a U.S. military veteran, active duty service member or the spouse of someone who meets these criteria.
Jumbo Loans
Consider this if you are looking to buy a high-value property and your loan would exceed the limits set forth by Freddie Mac and Fannie Mae. For 2024, that loan limit is $766,550 in most of the U.S. A jumbo loan allows you to borrow more than that for a home, and interest rates are similar to conventional loan rates. However, borrowers typically need a credit score of 700 or higher and a down payment between 5-10%. This is a good option for those who have a lower debt-to-income ratio.
Benefits of a Larger Down Payment
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- More equity
- Better mortgage rate
- Lower payments
- Lower upfront/ongoing fees
Additional Things to Consider with Your Down Payment
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- Keep money in savings: Avoid being “house poor” by reserving some funds in your savings for emergencies and home repairs.
- Closing costs: These are the fees, taxes and other administrative expenses of buying a home. They are usually 2-6% of the home’s purchase price so ensure that you have enough cash on hand to cover this.
- Moving costs: If moving locally, the average cost is approximately $1,700 and if you’re moving 100 miles or more, it can cost as little as $2,700 on average or up to $10,000. Calculate that into costs as you venture into the process.
- Homeownership upkeep costs: Maintenance, home repairs, property taxes and HOA fees must be considered when buying a home. These ongoing expenses need to be factored into your budget.
- Down payment assistance programs: While the above seems daunting, many programs offer assistance for first-time homebuyers so shop around and make sure you’re taking advantage of all the resources you can.
- Down Payment Calculator: A quick way to determine the amount that fits your budget.
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