The first step toward buying a home is saving up for a down payment. A down payment is a sum of cash usually expressed as a percentage of the purchase price that gets paid upfront for a mortgage. It is a standard requirement for most home loans.
For example, a 20% down payment on a $200,000 home would be $40,000. While the amount needed for the down payment differs depending on the specific mortgage program and the buyer’s financials, the general rule of thumb is to put down as much as you can without totally depleting your savings. A larger down payment increases the chances the loan will get approved, may prevent the need for mortgage insurance, and lowers monthly mortgage payments. So, how much down payment is needed to buy a house? Read on for more details.
Do you need a 20% down payment on a house?
A common belief is that a 20% down payment is required to purchase a home. That’s untrue. According to data from the National Association of Realtors (NAR), since 2018, typical down payments for first-time homebuyers have ranged between 6% to 7%. How much a buyer puts down depends on the type of mortgage they’re trying to get, lender requirements, and other personal financial factors.
Some government-backed loans, such as loans from the United States Department of Agriculture (USDA) and Veterans Administration (VA) programs, allow purchasers to get a mortgage with zero down payment. Buyers can take out a Federal Housing Administration (FHA) loan for as little as 3.5% down. Some conventional loans will accept a 3% down payment. However, there’s a reason that 20% down payments are hailed as the standard. Putting down less than 20% on a conventional loan often means that buyers will be required to pay private mortgage insurance (PMI) premiums, which require an additional monthly fee. In some cases, PMI may be paid with both up-front and monthly surcharges.
What are the minimum down payment requirements?
There are multiple loan options for buyers who can’t afford the full 20% down payment. The minimum down payment required to get a mortgage varies according to the type of loan program. Depending on the mortgage being taken out, many of the low- or zero-down payment programs require homebuyers to pay for mortgage insurance.
0% down payment loans
There are a couple of government-backed programs that allow certain buyers to take out home loans with a zero down payment. These include VA and USDA programs. VA loans offer lower-than-average interest rates for as little as 0% down for qualified U.S. veterans, active-duty military personnel, and eligible surviving spouses. USDA loans provide no down payment loans for rural and suburban home buyers in certain zip codes who meet specific income limits.
3% down payment loans
Some conventional mortgage programs offer loans with down payments as low as 3% for buyers who meet certain income limits (in addition to other requirements). These loans, which follow guidelines set by the government-sponsored lenders Fannie Mae and Freddie Mac, often require buyers who put down less than 20% to pay for private mortgage insurance (PMI). However, homeowners can ask to cancel the PMI once their equity exceeds 20%.
3.5% down payment loans
The Federal Housing Administration (FHA) provides mortgages for as little as 3.5% down for buyers with a credit score of at least 580. Buyers with lower credit scores – between 500 and 579 – can still get approved for the FHA program; however, those loans require a larger down payment of 10%.
10% down payment mortgages
Homes that exceed the conforming loan limit ($726,200 in most counties this year) set by the Federal Housing Finance Agency (FHFA) generally require higher-than-normal down payments because these loans can’t be guaranteed by Fannie Mae and Freddie Mac.
How much should you put down on a house?
The ideal down payment depends on each buyer's home-buying goals and financial situation. There are numerous benefits to putting down a larger sum upfront, including lower monthly payments and lowering the amount (or eliminating the need) for private mortgage insurance. However, buyers should be sure to have enough cash left over for move-in costs and potential repairs after closing. There are many online mortgage calculators that help buyers look at different scenarios and determine what size down payment fits their individual needs.
Larger down payment pros and cons
There’s no one-size-fits-all solution to the amount of cash that should be put down on a home. Though the savings can be substantial, a 20% down payment isn’t right for every buyer. Some simply cannot afford it. Others may need to keep cash in reserves for moving, repairs, or unexpected expenses. Here are the pros and cons of putting down 20% or more on a home:
Pros of a 20% down payment
- Lower monthly payments: Not only does a 20% down payment eliminate the need for private mortgage insurance, but larger down payments tend to mean lower interest rates and payments. Because interest is lower and the size of the loan is smaller, buyers who put down a large amount can save thousands of dollars over the life of the loan.
- Higher share of equity: The larger the down payment, the greater the share of equity owned outright. Equity can come in handy for homeowners who’d like to finance a big renovation or other large expenditures by borrowing against their home at a better interest rate using a home equity loan, home equity line of credit (HELOC), or a cash-out refinance. Plus, the more equity that’s been accrued the more money will be recouped when the house is sold.
- Reduced closing costs: The fees that get paid to the lender at closing are usually calculated as a percentage of the mortgage value. So, if less money is borrowed, those fees will be cheaper.
- Competitive edge over other buyers: In a multiple bidding situation (also known as a seller’s market), a bigger down payment can make an offer more competitive. Depending on the type of loan being taken out, there can be more hoops the seller and property have to jump through to close the deal than with a conventional loan. Many sellers feel more confident that a buyer with a larger down payment can afford the home and that the loan will close.
Cons of a 20% down payment
- Longer time saving up: It takes most buyers months, if not years, to save up for a down payment. Waiting to get to a 20% down payment can mean spending more money on rent and risking an increase in home prices in the meantime. For some buyers, it may be more affordable to pay PMI and higher interest rates than to pay rent while risking getting priced out of the housing market.
- Less money for repairs and renovations: Some buyers want a fully renovated home, so homes that require updating can often be snapped up as a bargain. However, if all of the money goes toward a down payment, buyers may be living with ugly carpet or an outdated kitchen until they can save up again.
- Greater financial risk: Once a down payment is put into a mortgage, it’s difficult to get it out. Buyers who worry they may need that cash for something else in the future may be better off holding some in reserves.
Can you buy a house without a down payment?
Yes, it’s possible to buy a home without a down payment, especially with government-backed mortgage programs, like those offered by the USDA and the VA. These loans are insured by the government, so lenders take on less risk; the government will cover the costs for buyers who default. Because of this, lenders are often able to offer lower interest rates.
VA loans are available to current and former military personnel, as well as some surviving spouses who meet certain criteria. USDA loans are available in qualifying rural and suburban zip codes.
How much you put down is up to you
Buyers don’t need to wait to save up a 20% down payment to buy a home. Conventional loans can be obtained with down payments as little as 3%.Qualified applicants can secure a mortgage without a down payment through VA or USDA loan programs.
A lower down payment can help buyers reach their goal of homeownership faster, but it will probably cost more in the long run because of the added costs of higherinterest rates and PMI. Every buyer needs to weigh the pros and cons of their situation to figure out what will work best for them.
Frequently asked questions (FAQs)
Do you have to put a 20% down payment on a house?
While 20% is considered the ideal standard for a down payment on a house, there are loan programs that will accept a lower down payment. Government-backed USDA loans and VA loans help qualify for a mortgage without a down payment. Some conventional mortgages require a down payment as small as 3%. FHA loans start with down payments as small as 3.5%. In some cases, a down payment of less than 20% will require buyers to pay additional monthly costs, like PMI, or accept higher interest rates.
What other costs are there when buying a house?
After the down payment, buyers also need to plan to pay closing costs, which vary from state to state but range from .05% to about 5.5% of the sale price. Closing costs include various taxes and fees, including title insurance, transfer taxes, appraisal fees, and home inspection fees.
Some lenders require buyers to prove they have enough cash in reserves to cover up to six months of mortgage payments. Lenders may also consider credit score, debt-to-income (DTI) ratio, and loan-to-value (LTV) ratio.
Why do mortgage lenders require a down payment?
A down payment helps protect lenders from a buyer defaulting on a loan. There are also down payment guidelines set by Fannie Mae and Freddie Mac. These government-sponsored programs guarantee the vast majority of mortgages issued in the United States. (The 20% down payment requirement comes from Fannie Mae and Freddie Mac’s guidelines.)
Do you have to put 20% down on a house?
A 20% down payment can lower interest rates and eliminate the additional cost of PMI premiums. However, those willing to pay extra interest and fees can take out conventional loans with a 3% down payment. Buyers can qualify for an FHA loan with a 3.5% down payment. Qualified homebuyers can even qualify for a mortgage without a down payment (and no PMI) if they are eligible for a USDA loan or a VA loan.
