A down payment is a sum of money that you put towards the purchase of a home upfront. It’s a way to show lenders that you’re serious about the investment and that you’ll be a trustworthy borrower. The minimum amount of the down payment can vary depending on the type of mortgage, but a 20% down payment has been the traditional benchmark for many years.
In this article, we’ll discuss what a down payment is, the benefits of making a larger down payment, and the minimum requirements for common types of mortgages. We’ll also cover how to calculate your down payment and offer some considerations when determining the size of your down payment.
What is a Down Payment?
A down payment is the portion of the purchase price that you pay upfront to buy a home. Typically, it’s a percentage of the total purchase price. For example, if you want to buy a house that costs $200,000 and you make a 10% down payment, you would pay $20,000 upfront, and the remaining $180,000 would be financed through a mortgage.
Down Payment Requirements for Home Buyers
The amount of money you need to put down on a house depends on the type of mortgage you get and your credit score. For a conventional mortgage, you typically need to put down at least 20% of the purchase price of the home. If you put down less than 20%, you will likely have to pay mortgage insurance premiums (MIP).
MIP is an additional monthly payment that helps protect the lender in case you default on your loan. There are some government-backed mortgage programs that allow less than 20%. These programs typically have more stringent credit requirements and may require you to pay MIP.
Minimum Down Payment for House for First-Time Buyer
The minimum down payment for a house for a first-time home buyer is typically 3% of the purchase price. However, there are some government-backed mortgage programs that allow you to put down even less.
For example, the Federal Housing Administration (FHA) allows you to put down as little as 3.5%. If you are a first-time home buyer, you may be eligible for down payment assistance programs. These programs can help you save for a down payment or cover closing costs.
Down Payment Required for a Second Home
The down payment required for a second home is typically the same as the down payment required for a primary home. However, some lenders require a higher down payment for a second home. If you are buying a second home, you may be eligible for down payment assistance programs. However, these programs are typically more limited for second home buyers.
Down Payment on Your Investment Property
The down payment required for an investment property is typically the same as the down payment required for a primary home (typically 3%) . However, there are some lenders who may require a higher down payment for an investment property.
If you are buying an investment property, you may be eligible for down payment assistance programs. However, these programs are typically more limited for investment property buyers.
- Adjustable-rate mortgages (ARM): Typically require a down payment of 5% to 20%, depending on the lender, the local market and the borrower's credit score.
- Jumbo loans. These are large mortgages that exceed the conforming loan limit set by Fannie Mae and Freddie Mac. Jumbo loans typically require a down payment of at least 10% to 20% of the home's purchase price.
- Conventional fixed-rate loans. Usually require a down payment of at least 3% to 20% of the home's purchase price.
- FHA loans. The down payment requirement for a Federal Housing Administration loan depends on the borrower's credit score. Borrowers with a credit score of 580 or higher may qualify for an FHA loan with a down payment as low as 3.5% of the purchase price of the home. However, borrowers with a credit score between 500 and 579 are typically required to make a down payment of at least 10%.
- VA loans. Offered by the Department of Veterans Affairs to eligible veterans, active-duty service members, and surviving spouses, VA loans require no down payment.
Here are some additional things to keep in mind when you are considering how much money to put down on a house:
- The higher your down payment, the lower your monthly mortgage payments will be.
- A lower down payment may make it harder to get approved for a mortgage.
- You may have to pay mortgage insurance premiums (MIP) if you put down less than 20%.
- MIP can add hundreds or even thousands of dollars to your monthly mortgage payment.
- It is important to have enough money saved for a down payment and closing costs. Closing costs can add up to 5% to the home purchase price.
Can You Buy A House Without A Down Payment?
The primary way to purchase a house without a down payment is through a government-subsidized mortgage. These programs include:
- Veteran Administration (VA) loans: Available to current of former members of the U.S. military and their spouses, this type of loan allows borrowers to obtain a no down payment mortgage. VA loans typically offer more favorable terms and interest rates, lower closing costs and more flexible qualification requirements than typical mortgage loans.
- United States Department of Agriculture (USDA) loans: This type of loan is designed to help borrowers in rural areas purchase a home with no down payment. To be eligible, borrowers must meet certain income requirements and the property must be located in a USDA-eligible rural area, which has strict guidelines.
While government-backed loans offer the opportunity to purchase a home without a down payment, it's essential to consider the potential drawbacks. Prior to taking a VA or USDA loan, consider that these loans may require:
- More stringent eligibility criteria, including income limits and property location requirements.
- Higher monthly payments due to higher amount borrowed, as well as possible higher interest rates or mortgage insurance premiums.
- Closing costs or a good-faith deposits. These expenses can add up quickly, so it's essential to factor them into your overall budget.
Buying a house without a down payment is possible, but it may not be the best choice for everyone. It's essential to consider your financial situation and long-term goals when deciding on the best mortgage option for you.
What’s The Difference Between A Hard And Soft Credit Check?
Managing Travel Costs: Tips for Holiday Season Savings
Do You Need to Put 20% Down on a House?
The “20% rule” refers to the idea that you should put at least 20% down when buying a house. While this has been a traditional benchmark for many years, it’s not a hard and fast rule. The optimal amount of the down payment can vary depending on the type of mortgage and your financial situation and other factors.
Here are the pros and cons of putting 20% down:
|Less money borrowed. The greater the down payment, the lower the amount that must be borrowed. A lower loan amount means lower monthly payments.||Harder to come up with the money. Coming up with 20% of the purchase price can be challenging, especially for first-time homebuyers.|
|Lower interest rates. Putting 20% down can help you secure a lower interest rate, which can save you thousands of dollars over the life of the loan.||Opportunity cost. If you put a larger sum of money down, you’ll have less money available for other investments like stock market, or for emergencies.|
|No private mortgage insurance (PMI). If you put down less than 20%, you may have to pay for private mortgage insurance, which can add hundreds of dollars to your monthly mortgage payment.||Delaying homeownership. If you wait until you have 20% saved, you may miss opportunities to buy a home in a favorable real estate market.|
|More equity in your home. A larger down payment for a house means you’ll have more equity in your home upfront, which can be helpful if you need to sell or refinance in the future.||Potential loss of returns: If you put up a large down payment and the price of your home depreciates over time, you can lose money.|
A minimum down payment for an investment property typically ranges from 15% to 25%, depending on the type of property as well as other factors. It's also worth noting that down payments are just one aspect of the home buying process.
You'll also need to consider closing costs, which typically range from 2-5% of the purchase price. It's important to factor these costs into your overall budget to ensure that you can afford to buy and maintain your new home.
Benefits of Making a Larger Down Payment
While it's possible to buy a house with a minimal down payment, there are many benefits to making a larger down payment. A larger down payment can:
- Lower your monthly mortgage payment and reduce the total amount of interest you'll pay over the life of the loan.
- Make you a more attractive borrower to lenders, as it demonstrates your ability to save and manage your finances responsibly. This can lead to a lower interest rate and better loan terms.
- Provide a buffer down the road in case of financial hardship, such as a job loss or medical emergency. By putting more money down upfront, you'll have more equity in your home, which can make it easier to borrow against, sell or refinance if necessary.
How much down payment for a house should you put down?
While there's no one-size-fits-all answer, many financial experts recommend putting down at least 20% of the home's purchase price. There is also the “28% rule,” which suggests that your monthly mortgage payment should not exceed 28% of your gross monthly income.
While this rule can be a helpful guideline for determining how much you can afford to borrow, it's important to consider other essential factors such as your budget, savings, and long-term financial goals. Ultimately, the right down payment amount will depend on your individual circumstances and financial situation.
How to Calculate Your Down Payment?
To calculate your down payment, you'll need to know the purchase price of the home, as well as the type of mortgage you're applying for and the interest rate you qualify for. Here’s the formula:
Down Payment = Purchase Price x Down Payment Percentage
For example, if you're buying a home that costs $300,000 and you're putting down 20%, your down payment would be:
$300,000 x 0.20 = $60,000.
To estimate your monthly mortgage payment, you can use a mortgage calculator that takes into account your loan amount, interest rate, and term in years.
For example suppose you wish to buy a $300,000 home with the 20% ($60,000) down payment. If you were to secure a 30-year mortgage for that home at an interest rate of 5.5%, your amount borrowed would be $240,000 ($300,000 - $60,000). Inputting these figures into a mortgage calculator would yield a monthly mortgage payment of around $1,361.
Other Considerations to Determine Your Down Payment
When determining the size of your down payment, there are several other factors to consider:
- Your budget. While a larger down payment can be beneficial, it's important to ensure that you're not stretching your finances too thin. Make sure you have enough cash reserves to cover unexpected expenses and that you're not sacrificing other financial goals, such as saving for retirement.
- Your credit score. Your credit score can affect the interest rate you qualify for and the required down payment for a house. Borrowers with a higher credit score may be able to put down a smaller down payment, while those with a lower credit score may need to put down more.
- Your debt-to-income ratio (DTI). A DTI shows that you can manage your finances and repay the loan. Read more here: What is Debt-to-Income Ratio and Why It’s Important.
- The loan program you’re using. Different loan programs have different down payment requirements, so it’s important to research your options and understand the pros and cons of each program.
The amount of down payment you need to purchase a house will depend on several factors, including the price of the home, the type of mortgage you’re using, and your personal financial situation. While a larger down payment can help you save money on interest and reduce your monthly payment, it’s not always necessary or feasible for everyone. It’s important to do your research, understand your options, and make a decision that aligns with your financial goals and budget.
Do you have to put down 20% on a house?
No, you don’t have to put down 20% on a house. While a 20% down payment is often recommended to avoid private mortgage insurance (PMI), there are many loan programs available that allow for a smaller down payment.
What is a typical down payment on a house?
The typical down payment on a house can vary depending on the market and the type of loan program you’re using. However, according to industry sources, it is estimated that the overall median down payment nationwide is around 13-15% (after excluding those with 0% down payment).
How do I get money for a down payment?
There are several ways to get money for a down payment, including saving up over time, receiving a gift from a family member, selling assets, or taking out a personal loan. It’s important to consider the pros and cons of each option and make a decision that aligns with your financial goals and budget.