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How Much Money to Put Down on a Mortgage?

Jackson Forelli Updated: June 26, 2023 • 4 min read
Saving Cash in a Jar for a Mortgage Down Payment

When it comes to mortgages, there is a lot of confusion amongst the general public. Many Americans are not aware of the flexibility that mortgages provide during the home buying process. Mortgages provide individuals the ability to purchase a home without having to initially cover 100% of the value of the home. Choosing the right type of mortgage is paramount when purchasing a home!

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 What is a Mortgage Down payment?

A mortgage is a loan used to buy houses and other types of real estate. The buyer reaches an agreement with the seller, and then the buyer uses a lender to cover a portion of the real estate purchase. The home itself is used as collateral in the purchase, so if the borrower misses enough payments to the lender, the lender can seize the property.

In order to qualify for most mortgages, a borrower will be required to make an initial down payment. A mortgage down payment is the initial payment from the buyer and is often quoted as a percentage of the total value of the house. For example, if a house is valued at $300,000, and the prospective buyer wants to make a 20% down payment, the prospective buyer would need to initially pay $60,000 (20% of $300,000) to secure the mortgage. From information gathered by Lendstart we can see that 20% is a typical down payment for a house, but there are other down payment options available to the buyer.

What is the Minimum Down Payment?

This is a difficult question to answer, as the minimum down payment depends on the type of mortgage that is used. Some people managed to avoid mortgage insurance, by providing a minimum of 20% down payment. If homeowners are ok paying mortgage insurance, government loans may prove to be a viable option.

FHA loans, backed by the Federal Housing Administration, require as little as 3.5% down.

VA loans, guaranteed by the U.S. Department of Veterans Affairs, do not often require a down payment. VA loans have specific qualifications, they are used by current and veteran military service members and eligible surviving spouses.

USDA loans, backed by the U.S. Department of Agriculture's Rural Development Program, also have no down payment requirement. USDA loans are for rural and suburban home buyers, and have strict income limits in order to qualify.

Some more conventional options, such as the Fannie Mae “HomeReady” and Freddie Mac “Home Possible” mortgages, require as little as 3% down. Conventional loans are not backed by the government, but follow the down payment guidelines set by the government-sponsored enterprises Fannie Mae and Freddie Mac. 

Should You Pay 20% as a Down Payment?

Traditionally, a 20% down payment has been viewed as the standard with regard to buying a home. However, with the rising values of homes across the country, many buyers cannot afford to put down 20% anymore. Fortunately, there are options available today for home buyers looking to put down less than 20%. It is important to note that these options come with some tradeoffs.

First, it is essential for the home purchaser to consider what they can afford to pay as a down payment. Even with a down payment of 20%, the homeowner will need to make monthly mortgage payments to pay off the remaining 80% of the home’s value. Careful consideration of the homeowner’s income and debts is important when setting a limit on monthly mortgage payments. The length of the loan is another factor that home buyers should keep in mind.

A big consideration when making a down payment of less than 20% is the private mortgage insurance (PMI) that is required. The PMI bill will be due each month and will add to the homebuyer’s monthly payments. Also, remember that the mortgage payment is not the only cost to consider as a homeowner. Property taxes, home owner’s insurance, maintenance fees, possible Home Owners Association dues are other costs homeowners should consider before deciding to use PMI.

There are certain types of mortgages that will allow a home buyer to put less than 20% down on a home purchase. Government mortgages such as FHA, VA, and USDA loans all offer low down payment options. These loans tend to have stricter qualifications than a commercial loan, such as income limits and credit scores. PMI will be required on all of these loans if the down payment is less than 20%.

How Does the Down Payment Affect Offers?

Historically, buyers that can put down sizable down payments have a leg up on those that can’t. In a hot real estate market, the seller often receives multiple offers on a home. The buyers with the largest down payments look the best to the seller, as it shows they have the most skin in the game. 

A large down payment is more likely to lead to final loan approval. Buyers with larger down payments tend to cover more of the closing costs, rather than asking the seller to contribute. Overall, many sellers choose the purchaser that offers the largest down payment, as these buyers are viewed as less of a hassle.

There are a lot of important considerations home buyers need to take into account. The financing of a home may be near the top of the list. Luckily, it has never been easier to compare mortgage rates from lenders. There are resources available that allow home purchases to explore the best mortgage rates.

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Jackson is a consultant for a large American Asset Manager, notable clients include Morgan Stanley, Merrill Lynch, and Wells Fargo. He also writes on financial topics, including bitcoin, personal finance, and portfolio construction. Avid skier during the cold New England winters.