When you buy a house, you’ll likely make a down payment on the purchase, which is the amount you’re not financing with a mortgage. Here’s everything you need to know about making a down payment on a home, including what the minimum down payments are for different types of mortgages.
What is a home down payment?
A home down payment is simply the part of a home’s purchase price you pay upfront and does not come from a mortgage lender via a loan.
Suppose you want to buy a house priced at $100,000. If you put $3,000 toward the purchase price, or 3 percent down, you’ll take out a mortgage for the remaining $97,000. If you were to put down $20,000, your mortgage would now be for $80,000, and your down payment would equal 20 percent of the purchase price.
Mortgage lenders often refer to the percentage of the purchase price that they finance as a loan-to-value ratio, or LTV. Using the above examples:
- When you put $3,000 down (3 percent) on a $100,000 house, your LTV is 97 percent.
- When you put $20,000 down (20 percent) on a $100,000 house, your LTV is 80 percent.
LTV is important because it’s how lenders describe the maximum loan they will make.
Generally speaking, a larger down payment can make it easier for you to get approved for a mortgage, and allow you to buy more house for the same monthly payment, or even less. Here’s an example:
Smaller vs. larger down payment
|Homebuyer||House price||Down payment amount||Percent down||Monthly principal and interest||Monthly PMI||Total monthly payment|
Note: This example assumes a 4 percent interest rate. Sources: Bankrate, Radian mortgage insurance calculator
Note that there is a trade-off between your down payment and credit rating. Larger down payments can offset (to some extent) a lower credit score. Higher credit scores can offset (to some extent) a lower down payment. It’s a balancing act.
For many first-time buyers, the down payment is their biggest obstacle to homeownership. That’s why they often turn to loans with smaller minimum down payments. Many of these loans, though, require borrowers to purchase some form of mortgage insurance. Typically, lenders will require mortgage insurance if you put down less than 20 percent.
However, mortgage insurance is not necessarily a bad thing if it gets you into a home and starts you on the road to building equity. Consider this: If you save $250 a month, it will take you more than 12 years to accumulate the $40,000 needed for a 20 percent down payment on a $200,000 house.
Why mortgage lenders require a down payment
Very few mortgage programs allow 100-percent, or zero-down, financing. The reason for requiring a down payment on a home is that it reduces the risk to the lender in several ways:
- Homeowners with their own money invested are less likely to default (stop paying) on their mortgages.
- If the lender has to foreclose and sell the property, it’s not on the hook for the entire purchase price, which can limit its potential losses if the home is sold for less than the remaining mortgage balance.
- Saving a down payment requires discipline and budgeting. This can set up borrowers for successful homeownership.
Down payment sources
There are many ways to come up with a down payment to buy a home. For repeat buyers who have positive equity in their current home, it’s often the proceeds from selling that home that helps make a down payment on another one. Other sources include:
- Selling assets like cars or collectables
- Borrowing against a 401(k) retirement plan
- Down payment assistance (DPA) programs from employers, nonprofit organizations and government agencies
- Gifts from family members and friends
Some down payment sources, however, are not allowed by lenders. These include loans or gifts from anyone who would benefit from the transaction, such as the home seller, real estate agent or lender.
Why down payments are good for homebuyers
If you’ve never owned a home, saving for a down payment provides good practice for homeownership.
Suppose you currently rent a house for $800 per month, and the payment for the home you want to buy would be $1,200 per month. You can “practice” for homeownership by putting the $400 difference into savings. This accomplishes three things:
- Your down payment savings grows.
- You get used to having less spending money.
- You may avoid an expensive mistake if you realize that you can’t handle the larger payment.
Many financial experts agree that having a down payment is a good sign that you’re ready for homeownership. If you can make the necessary sacrifices to amass a down payment, then you’ll likely be able to manage expenses that come with owning a house, including monthly mortgage payments, maintenance costs and property taxes.
What is the minimum down payment on a house?
Most first-time homebuyers want to know the minimum down payment on a house. It depends on the mortgage program, the type of property you buy and the price of the home, but generally ranges from zero to 20 percent for most types of mortgages.
Types of down payment: Conventional, FHA, VA and USDA
You might be surprised to find that some mortgage programs have low down payment requirements.
Most conventional loans have guidelines set by either Freddie Mac or Fannie Mae that allow for a smaller down payment. However, to compensate for the risk of this low down payment, conventional lenders require borrowers to purchase private mortgage insurance, or PMI, when they put less than 20 percent down. With PMI, you can borrow up to 97 percent of the home’s purchase price — or, in other words, put just 3 percent down. Some property types, like duplexes, condominiums or manufactured houses, require at least 5 percent down.
Some of the mortgage programs requiring the smallest down payments are government-backed loans: FHA, VA and USDA.
- FHA loans require 3.5 percent down for borrowers with credit scores of 580 or higher. Borrowers with lower credit scores (500 to 579) must put at least 10 percent down.
- Eligible VA loan borrowers can get mortgages with zero down (100 percent LTV).
- Eligible USDA loan borrowers can also borrow 100 percent.
Government-backed loans require borrowers to pay for some form of mortgage insurance, as well. With FHA and USDA loans, it’s called MIP, or mortgage insurance premiums. For VA loans, it’s called a funding fee.
This insurance covers potential losses suffered by mortgage lenders when borrowers default. Because insurance protects lenders from losses, they’re willing to allow a low down payment.
Home down payment: When bigger isn’t better
While making a larger down payment offers many benefits, it’s not always the right decision. In general:
- Don’t deplete your emergency savings to increase your down payment. You’re leaving yourself vulnerable to financial emergencies.
- It’s not wise to put savings toward a larger down payment if you’re carrying high-interest debt like credit cards. You’ll make yourself safer and pay less interest by reducing debt before saving a down payment.
- Putting off buying a home for many years to save a large down payment can be a mistake. While you’re saving your down payment, the price of that house is probably going up. While appreciation is not guaranteed, home prices in the U.S. have historically increased each year.
The size of your mortgage down payment is obviously a very personal decision. Tools like Bankrate’s affordability calculator or down payment calculator can help you determine the right amount for you, and so can a trusted mortgage professional. Ultimately, the decision comes down to your desire, your discipline and your resources.