What is a down payment on a home?
A down payment is the portion of the sale price of a home that is not financed, which means this is the money you’ll pay upfront at closing, in addition to mortgage-related charges and fees. Down payments are expressed as a percentage of the total sale price.
The down payment represents the buyer’s immediate cash equity in the home with the remainder paid over time in the form of mortgage payments. As you pay off your mortgage and the value of your home increases, your home equity grows.
How to calculate a down payment
You can use Bankrate’s down payment calculator to get a sense of how different down payment amounts impact your mortgage payment and the interest you can save.
How much you’ll be able to afford to put down depends on a few factors, but in general, the bigger your down payment, the better. That’s because the less you have to finance with your mortgage, the cheaper that loan will be.
How much is a down payment on a house?
The amount you’ll be required to put down on a home depends on the type of loan you get and on the lender’s requirements. Factors including your income, cash on hand, credit score and debt-to-income ratio can affect whether or not you qualify and the terms of your loan.
In general, borrowing a conventional loan — one available through or guaranteed by a private lender or either of two government-sponsored entities, Fannie Mae or Freddie Mac — requires a down payment in the range of 5 percent to 15 percent. Some conventional loan programs allow for a down payment of just 3 percent, however, so there are options for those who have less cash available.
That said, a down payment of 20 percent on a conventional loan means you’ll avoid having to pay for private mortgage insurance, or PMI, which can add significantly to your monthly mortgage payment.
Twenty percent isn’t the magic number for every kind of mortgage. Other loans allow for much less down — as little as 3.5 percent for some government-backed programs — and qualifying military servicemembers or veterans may not need to put any money down at all.
So, if you’re buying a house for $100,000:
- A 3.5 percent down payment translates to $3,500.
- A 20 percent down payment translates to $20,000.
How much should you put down on a house?
How much you should put down on a house is a personal decision that mainly depends on your finances and what loan program you use.
If you’ve saved up a good chunk of money over time or have a windfall you can apply to a down payment, you’re ahead of the game. If you’re just starting out, it could take months or even years to save for a down payment. There are closing costs to save for, too.
As noted, some loan programs don’t require any down payment, while others require just 3 percent down, but there can be a catch: Lenders may charge a higher interest rate to mitigate their risk on these types of loans, which means you’ll pay more interest over the life of the loan.
Consider that when you put down more money, your monthly mortgage payment and your loan-to-value ratio will be lower. The LTV ratio, which divides the loan amount by the home’s value, plays a key role in your mortgage approval. It also helps determine how much money you can borrow from a lender.
Benefits of making a larger down payment
Your ability to save for a down payment is a good sign that you’re ready for the financial commitment of owning a home.
Down payments also protect buyers from negative equity if the market suffers a downturn. If you put 3 percent down, say, and the market value of the home falls by 5 percent, you’ll owe more than what the house is worth and you’ll be underwater on your mortgage by 2 percent. However, if you had put down 20 percent in that same market, you’d still have equity in your home.
Aside from protecting your investment, making a larger down payment can save you money in the long run. Here are some of the ways it can affect your finances:
- Lower mortgage interest rate – The less money you borrow, the less interest you’ll have to pay, and generally, the lower your interest rate will be.
- More equity – The greater percentage of your home you own outright, the higher your equity. That can be especially handy if you’re looking to finance a big renovation project or other purchase, because you can tap your home equity through a cash-out refinance, home equity loan or home equity line of credit (HELOC) to borrow money against the value of your home relatively cheaply.
- Lower monthly payments – Hand-in-hand with low interest rates, the less money you’ve borrowed, the less you’ll owe, and that means less to pay off each month.
- Cheaper closing costs – The fees you pay to your lender at closing are usually calculated as a percentage of your loan’s total value, so the less you borrow, the less you’ll owe them at closing, too.
Minimum down payment requirements
Maybe you already have a down payment amount in mind. Here’s a look at the minimum requirements of some common loan types.
Conventional loan: 3 percent – 5 percent
Conventional loans backed by semi-governmental lenders Fannie Mae and Freddie Mac can require just 3 percent down, but they may have some income restrictions and stringent credit requirements to qualify. Lenders often require 5 percent to 15 percent down for other types of conventional loans.
When you get a conventional loan with a down payment of less than 20 percent, you have to pay for private mortgage insurance (PMI). The monthly cost of PMI varies, depending on your credit score, the size of the down payment and the loan amount. Note that some lenders might waive PMI, but they often charge a higher interest rate to account for the greater risk.
FHA loan: 3.5 percent
For an FHA loan insured by the Federal Housing Administration, the minimum down payment is 3.5 percent. That means you’ll receive the maximum financing FHA offers at 96.5 percent, but you need a FICO score of at least 580 to qualify.
FHA loans come with an upfront mortgage insurance premium (MIP) and annual MIP.
The upfront MIP is 1.75 percent of the base loan total and the annual MIP varies by the length of the loan and how much you put down. For 30-year fixed-rate loans with an LTV less than 95 percent, you’ll pay 0.80 percent, or 80 basis points. The same loans with an LTV higher than 95 percent have an MIP of 0.85 percent, or 85 basis points. Those numbers will be higher (100 and 105 basis points, respectively) for loans worth more than $625,500.
You can make a higher down payment than the minimum on an FHA loan. To encourage that, the FHA charges lower borrowing costs if your down payment is 5 percent or more. One difference between the FHA and private mortgage insurance is that the FHA doesn’t charge more to people with lower credit scores.
There’s a notable drawback to putting down less than 10 percent on an FHA loan. When you do this, you cannot cancel annual mortgage insurance premiums; you’ll pay those for the life of the loan or until you refinance or sell.
VA loan and USDA loan: Zero percent
The U.S. Department of Veterans Affairs (VA) and the U.S. Department of Agriculture (USDA) guarantee zero-down payment loans for qualified homebuyers.
With both loan types, you borrow from a regular lender, but the VA or the USDA guarantees the loan. There is no mortgage insurance, but you’ll likely have to pay a funding fee or guarantee fee.
How much is the average down payment?
In 2020, the median down payment on a home was 12 percent for all buyers, the National Association of Realtors found. It was lowest for first-time homebuyers, at only 7 percent, and highest for repeat buyers at 16 percent.
Why mortgage lenders require a down payment
For lenders — whether it’s a bank, credit union, or other type of lender — a down payment helps offset their risk in making a mortgage loan because it means the borrower immediately has some skin in the game and an investment to protect. The more money you put down, the less the lender stands to lose if you default on payments and the lender has to foreclose, especially early in the loan term. This is why borrowers who put less than 20 percent down usually have to get PMI, as it protects lenders by repaying the unpaid portion of the loan if the borrower defaults.
In addition, the amount of the down payment can affect the interest rate you get, as lenders will typically offer lower rates for borrowers who make larger down payments.
Finally, down payments play a role in determining the amount you can borrow. Along with credit scores and debt levels, lenders look at the loan-to-value (LTV) ratio (the amount loaned relative to the value of the home) as part of the mortgage approval process. The larger your down payment, the better your LTV will be.
Don’t be intimidated by all the different loan options and their various down payment requirements. Consider working with a mortgage broker, especially if you’re a first-time homebuyer, to explore programs that may make sense for you and your situation.
Remember that It’s important that you don’t deplete your retirement savings account or your emergency fund to buy a home, or overstretch yourself with your purchase so you can’t keep contributing to those other financial goals.
With mortgage rates so low, now can be a great time to think about buying a house. Just make sure you understand all the costs ahead of time.