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. This down payment represents your initial equity in your new home. 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 were to put $3,000 toward the purchase price, or 3 percent down, you’d 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 home, your LTV ratio is 97 percent.
- When you put $20,000 down (20 percent) on a $100,000 home, your LTV ratio is 80 percent.
LTV is important because it’s how lenders describe the maximum loan they’ll 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. You might also get a lower rate and lower mortgage insurance premiums (if any). Here’s an example:
Bigger vs. smaller down payment
|Homebuyer||House price||Down payment||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 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 the 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 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 were to save $250 a month, it would take you more than 12 years to accumulate the $40,000 needed for a 20 percent down payment on a $200,000 house.
What is the minimum down payment on a house?
The minimum down payment on a house depends on the mortgage program, the type of property you buy and the price of the home. It can range from zero to 20 percent, and sometimes more depending on the property you’re buying.
Conventional down payment requirements
Most conventional loans allow for a smaller down payment thanks to the backing of Fannie Mae and Freddie Mac, the two government-sponsored enterprises that buy loans from mortgage lenders.
To compensate for the risk of this low down payment, however, the borrower is required to pay for 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 — in other words, put just 3 percent down. Some property types, like duplexes, condominiums or manufactured houses, require at least 5 percent down.
Down payments on government-insured loans
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 loans, it’s called MIP, or mortgage insurance premiums, which are paid upfront and then annually. For VA loans, it’s called a funding fee, and for USDA loans, there’s an upfront guarantee fee and then annual fees.
This insurance covers potential losses suffered by mortgage lenders when borrowers default. Because insurance protects lenders from losses, they’re willing to allow for a low (or no) down payment.
Down payments on jumbo loans
Jumbo loans, which are mortgages for higher amounts, typically require a down payment of at least 10 percent. Some lenders ask for 20 percent or even more, depending on your credit and the value of the home.
Do you need to put 20 percent down?
You might have heard that a 20 percent down payment is required to purchase a home, but that’s somewhat of a misconception. Depending on the type of loan you qualify for, you could get a loan with as little as 3 percent down.
The “20 percent” rule of thumb stems from the fact that for some types of mortgages, if you put down less than 20 percent, you’ll need to pay for mortgage insurance. This isn’t necessarily a downside — the insurance increases your monthly mortgage payment, but typically only until you reach 20 percent equity in your home (in other words, pay down the balance on your mortgage).
Putting down 20 percent can also make your offer stronger, but, again, it’s not a requirement.
How much is a down payment in 2021?
Among all homebuyers, the median down payment was 12 percent in 2019, according to the latest available data from the National Association of Realtors (NAR). For first-time homebuyers, that median down payment was 6 percent, and for repeat buyers, 16 percent.
As of August 2021, 74 percent of first-time buyers made a down payment of less than 20 percent, NAR reported.
Calculating how much house you can afford
When figuring out how much house you can afford, it can be helpful to start with the 28 percent rule, which stipulates you should spend no more than 28 percent of your gross monthly income on your mortgage payment.
For example, if your gross income is $5,000 per month, you should spend, at most, $1,400 on a mortgage payment, including the mortgage, homeowners insurance, property taxes and HOA fees.
Depending on your other expenses and risk tolerance, however, you might be able to adjust this rule somewhat.
You’ll also need to account for the down payment and closing costs, the latter of which ranges from 2 percent to 5 percent of home’s price. In general, if you have more cash saved up for these purposes, you can afford more home.
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, collectibles, crypto, mutual funds or stocks
- 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.
How to boost your down payment savings
If you plan to buy a home soon, one of the best savings strategies is to keep those funds safe while earning some return, such as in a high-yield online savings account.
If you know you won’t be buying a home for a few more years, you might want to consider investing your savings, such as in a CD or IRA. These could help you grow your savings faster, but also could put your money at risk. When weighing your options, consider how soon you expect to need the funds.
Of course, you should also take steps to increase the amount of money you can save, such as reducing unnecessary expenses or setting up a side hustle.
Why mortgage lenders require a down payment
Very few mortgage programs allow 100-percent, or zero-down, financing (which was a cause of the subprime mortgage crisis). That’s because a down payment on a home 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 help set up borrowers to be successful homeowners.
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’ll get used to having less spending money.
- You might avoid an expensive mistake if you realize you can’t handle the larger payment.
Many financial experts agree that having a down payment is a good sign 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 home, including monthly mortgage payments, homeowners insurance and maintenance, repairs, property taxes, HOA dues and utilities.
A larger down payment can also help you win a bid for a home, and potentially indicate that a lender will be less likely to refuse your loan application for some reason, like the home appraising for less than expected. By reducing uncertainty about whether the transaction can go through, the higher down payment makes your offer more competitive.
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 unexpected financial hits.
- It’s not wise to put savings toward a larger down payment if you’re carrying high-interest debt like credit cards. You’ll pay less interest and be less risky as a borrower by reducing high-interest debt (think greater than 6 percent or 7 percent) 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 home 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.