If you’re in the market for a home, it’s likely you’ll need enough cash upfront to make a down payment. While amassing down payment funds can be challenging, the idea that buyers need to put at least 20 percent down on a home isn’t true.
In reality, the minimum down payment for a house can be much lower, depending on factors such as the type of mortgage you choose and whether you’re willing to pay private mortgage insurance (PMI).
Let’s take a look at how much you really need.
What is the minimum down payment for a house?
When getting a mortgage, the down payment is the amount you contribute towards the purchase of the home — think of it as the amount you initially put up as your share of ownership. Lenders typically require a down payment for most types of home loans, but there are exceptions, such as USDA loans and VA loans.
Here are the minimum down payment requirements for various types of mortgages.
|Loan type||Minimum down payment|
|Conventional loan||3%-15% depending on lender|
|Jumbo loan||20% or more depending on lender|
|USDA loan||No requirement|
|VA loan||No requirement|
Conventional loans aren’t backed by the government, but follow guidelines and standards set by Fannie Mae and Freddie Mac, and require a down payment of as little as 3 percent. Many lenders, however, impose a 5 percent minimum.
FHA loans, backed by the Federal Housing Administration, are available for as little as 3.5 percent down if the borrower has a credit score of at least 580. If the borrower has a lower score (500-579), the minimum down payment is 10 percent.
USDA loans don’t require a down payment, but the borrower generally needs to be buying in a designated rural location to qualify. VA loans, which are available to active duty military and veterans and eligible surviving spouses, also don’t require a down payment.
Although FHA, USDA and VA loans don’t require 20 percent down, they may require other types of fees (such as a funding fee for a VA loan) or PMI in order to mitigate risk.
Jumbo loans, which exceed the guarantee maximums set by Fannie Mae and Freddie Mac, generally require a higher down payment than other kinds of mortgages. The minimum is usually determined by the individual lender, but can 20 percent, 25 percent, 30 percent or more.
Debunking the 20 percent down payment myth
Most homebuyers don’t put down 20 percent. In fact, in 2019, the median down payment was just 12 percent, and among first-time homebuyers, only 6 percent, according to a National Association of Realtors report.
As for where the 20 percent down payment myth comes from, it’s most likely based on Fannie Mae and Freddie Mac guidelines. To qualify for a guarantee from either of these entities, a borrower needs to either put 20 percent down or pay PMI to lower risk.
How to save for a down payment
Once you’ve determined how much you need to save for a down payment, there are different ways you can build your savings.
- Save now. Even if you’re still comparing mortgage offers and determining how much you really need, earmark savings specifically for your new home as soon as possible.
- Open a separate savings account. Keeping your down payment money with your other savings could tempt you to spend it elsewhere, so consider opening a separate account specifically for your home purchase. If you can, set up regular automatic deposits from your paycheck to your savings account so you’re more likely to stick to your savings plan.
- Calculate the amount you need. Determine a range you’ll need and figure out how much it’ll cost to put down your desired down payment amount. Don’t forget to factor in around 2 percent to 5 percent for closing costs.
- Make a timeline. Once you know how much you need, look at how much you’ve already saved and determine a timeline for when you want to achieve your savings goal. For example, if you want to save $20,000 in five years, you’ll need to save $4,000 per year, or $333 a month. You can also work the other way around and determine how much you can save each month by looking at your budget, and using that information as your timeline.
- Research assistance programs. You may be able to save less or buy a home sooner if you qualify for a down payment assistance Seek out help from a local housing counselor to learn your options.
Where to find down payment assistance
The federal government and local and state governments, as well as nonprofit organizations, offer programs to help make homeownership more affordable, including down payment assistance. These programs tend to be directed toward moderate- to low-income households who are purchasing their first home, but there are some options for repeat buyers, as well. Some even help public service workers, such as firefighters and teachers, buy a home in the communities they serve.
At any level, down payment assistance programs have varying requirements, so it’s best to consult with a local housing counselor. You can find one using the Consumer Financial Protection Bureau’s search tool, or by contacting your state housing agency.
Your exact down payment amount will depend on a number of factors, such as what you can afford and the mortgage you qualify for. Make sure to look at all of your options and understand what the minimum down payment for your home loan will be.
Keep in mind, also, that some loans may also have higher interest rates if you put down less than 20 percent. In general, expect to pay more for your mortgage the less you offer as a down payment.
Featured image by MoMo Productions of Getty Images.