If you’re tired of renting, you’ve probably been scouring real estate websites and dreaming of becoming a homeowner, but one big concern is weighing on you: figuring out how to come up with the minimum down payment for a mortgage.
The median existing-home price was $309,800 in December 2020, according to the National Association of Realtors. If you follow the commonly-held belief that 20 percent is the magic number for how much down payment you need for a house, you might assume you’ll never be able to buy your own home. In reality, though, the minimum down payment for a house can be much lower, depending on the type of mortgage you choose and whether you’re willing to pay extra costs for mortgage insurance.
Let’s take a look at how much you really need in order to stop renting and starting building equity in a home.
What is the minimum down payment for a house?
A down payment is the amount of money you contribute towards the purchase of a home upfront. Think of it as the amount you initially put up as your share of ownership. The higher your down payment, the less you’re asking to borrow — and the lower your monthly payments will be.
Lenders require a down payment for most types of home loans, but there are exceptions. Here are the minimum down payment requirements for various types of mortgages:
|Loan type||Minimum down payment|
|Conventional loan||3%-15% depending on lender and loan|
|Jumbo loan||20% or more depending on lender|
|VA loan||None required|
|USDA loan||None required|
Conventional loans follow guidelines set by Fannie Mae and Freddie Mac, but lenders can have their own requirements above those standards, as well. There are conventional loan options that require a down payment of as little as 3 percent, but many lenders impose a 5 percent minimum. If the loan is for a vacation home or a multifamily property, you could be required to put down more, generally 10 percent and 15 percent, respectively.
Jumbo loans, which exceed the loan limits set by Fannie Mae and Freddie Mac, tend to require a higher down payment than other kinds of mortgages. The minimum is usually determined by the individual lender, but it can be 20 percent, 25 percent, 30 percent or more.
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.
VA loans, which are available to active-duty military, veterans and eligible surviving spouses don’t require a down payment. USDA loans also don’t require a down payment, but the borrower needs to be buying in a designated rural location to qualify.
Although FHA, VA and USDA loans require low or no down payment, they may also require other types of fees (such as a funding fee for a VA loan) or mortgage insurance in order to mitigate risk.
Debunking the 20 percent down payment myth
You’ve probably heard that 20 percent is how much down payment homebuyers need to have in their pockets, but that’s not the case. Twenty percent is simply how much you need in order to avoid having to pay extra for mortgage insurance. The insurance is to protect the lender — since you’re borrowing more money with less down, you pose a bigger risk.
The reality is that as home prices continue to rise, most homebuyers can’t afford to put down 20 percent. The median down payment for first-time homebuyers was just 7 percent in 2020, the National Association of Realtors reports.
If so many are buying homes with smaller down payments, where did the 20 percent down payment myth come 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 mortgage insurance to lower risk.
How much should you put down?
It’s important to understand how much the down payment for a house will impact your payments. Consider a $200,000 home and a 30-year fixed mortgage with a 3.12 percent interest rate:
|Home price||Down payment||Amount borrowed||Monthly mortgage payment|
The monthly mortgage payment above doesn’t include homeowners insurance, property taxes, and, for the 5-percent down payment scenario, mortgage insurance. Making a 20 percent down payment means you won’t have to pay this added cost.
There’s another way to look at things, though. The premiums you have to pay on private mortgage insurance for a conventional loan are cancelled once you build 80 percent equity in the property. So, dealing with that extra cost temporarily can mean the difference between continuing to rent and buying your own place.
Another important consideration: A higher down payment can get you a lower interest rate, further saving you money each month. We didn’t account for that in the example here, but it’s one more reason why a larger down payment can be beneficial.
As you think about how much to put down on your house, consider these key factors before settling on an amount:
- Your emergency savings fund – Buying a house shouldn’t mean draining your savings to zero. If a crisis hits the week after you close on your home — say losing your job or receiving an expensive medical bill — will you have enough liquid savings to weather the storm?
- Your other monthly bills – What else are you paying for each month? Your car loan, phone service, groceries — none of these will disappear after you buy a home. Compare different down payments to get a sense of how it will impact your monthly mortgage bill and budget appropriately to make sure your income can continue to cover all of the essentials along with it. As a general rule, your monthly housing expenses should be 28 percent or less of your monthly income. For example, if you make $4,000 each month after taxes, you should aim to pay no more than $1,120 for your housing costs.
- Your closing costs — In addition to a down payment, you’re going to need to cover closing costs, a range of fees associated with your mortgage that typically come to 2 percent to 4 percent of your loan principal. Make sure that you have these funds set aside before determining your down payment.
You can use Bankrate’s down payment calculator to understand how different amounts will impact your bottom line. If you can afford a bigger down payment, remember not to stretch yourself too thin. You want to be able to enjoy living in that new house without depleting your entire savings and stressing about your finances.
How to save for a down payment
Once you’ve determined how much you need to save for a down payment, it’s time to focus on building your savings. Here are some tips:
- Start immediately. 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.
- Identify what to cut. Analyze your bank statements from the past few months to get a sense of where you can reduce spending and accelerate your savings. What would happen if you stopped ordering delivery? Can you eliminate some of your entertainment services?
- 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.
- 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 might be able to save less or buy a home sooner if you qualify for down payment assistance. The federal government and local and state governments, as well as nonprofit organizations, offer these types of programs to help make homeownership more affordable. They tend to be directed toward moderate- to low-income buyers 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.
Don’t let the 20 percent down payment myth prevent you from becoming a homeowner. Although some loans may charge higher interest rates if you put down less than 20 percent, and you may need to pay mortgage insurance, that extra cost can be worth it to get you on your way to building equity in your own home.