If you’ve been thinking about buying a home, you know that a down payment is required to get a mortgage. But you might be less sure about how much down payment for a house you really need.
Before you buy a house, it’s important to understand how down payments work and how much you’ll need to pay:
- What Is a Down Payment?
- Benefits of Putting at Least 20% Down
- Drawbacks to Putting Less Than 20% Down
- When It Makes Sense To Put Less Than 20% Down
- Mortgages With Low Down Payment Requirements
- How To Save For a Down Payment
- Down Payment Assistance Programs
- Down Payments for Second Homes and Investment Properties
- Down Payment FAQ
- The Bottom Line on Down Payments
What Is a Down Payment?
The down payment on a house is a percentage of the home’s sale price that the buyer pays upfront to secure a mortgage. The more a buyer can put down upfront, the less they need to borrow to purchase the home.
“The down payment is the amount of funds that a homebuyer needs in hand in order to finance a large purchase — in this case a property,” says Julie Aragon, CEO and founder of Aragon Lending Team, a mortgage broker in Los Angeles.
How much you need for the down payment depends on the loan type and your lender’s specific terms.
How does my down payment affect my mortgage?
Most mortgages come with minimum down payment requirements. Having a larger down payment means you need to borrow less money to buy a house, which will lower your monthly mortgage payment and the amount of interest you’ll pay over the loan term.
Traditionally, lenders prefer a down payment of 20%. For example, to purchase a $300,000 home, you would need to save $60,000 for a 20% down payment.
Why 20%? That threshold was set by Fannie Mae and Freddie Mac, two government-sponsored enterprises that buy mortgages and sell them to investors. To qualify for a mortgage loan backed by Fannie or Freddie, a borrower must put down 20% or pay private mortgage insurance, which is a fee that offsets the extra risk lenders take on loans with lower down payments. Typically, buyers pay PMI until their equity in the home passes 20% of its market value.
Is a 20% down payment required?
Not all loans are guaranteed by Fannie Mae and Freddie Mac, so putting 20% down isn’t always required. How much down payment on a house you must make depends on the loan type and lender.
“Some home loans may require far less of a down payment,” says Michele Hammond, a senior home-lending advisor for JPMorgan Chase & Co. in New York City. “The industry average is typically within 6% (and) 8%.”
To decide how much to save for a home down payment, use an online calculator to compare monthly payments, interest costs, and more.
Benefits of Putting at Least 20% Down
If you can afford to do so, it’s a good idea to put 20% down, according to Aragon. “The loan terms typically get better when more money is put down,” she says.
Other benefits include having an appealing offer and enjoying more financial security.
You save money on interest
Homes are expensive. As of May 2021, the median price of a home in the United States is $350,300, according to the National Association of Realtors.
So, when you take out a mortgage, you’re borrowing a lot of money. Even with a low rate, the interest on a loan adds up over 15 or 30 years. The more you can pay upfront, the less you need to borrow — and the less interest you’ll pay in total.
Your offer is more attractive to sellers
Putting more money down sweetens your offer because it establishes you as a reliable buyer.
“That down payment amount is also shared with a property seller, so they know how much a buyer has in cash versus the amount they’ll need a loan for,” Aragon says.
When evaluating offers, sellers want to be sure that the buyer can afford the home, and that their financing won’t fall through. Otherwise, the sale could be delayed if the buyer needs to secure new financing, or if the seller must find another buyer.
You start out with greater equity in your home
The more you owe on your home, the more vulnerable you are to market changes. Though you may expect to live in your home for many years, unforeseen events can change even the best-laid plans. If you finance most of the purchase and your home drops in value, you could owe more than it’s worth — making it difficult to sell the home or refinance.
“When you put more money down, you don’t worry as much about market fluctuation and the value of your home,” Hammond says.
Drawbacks to Putting Less Than 20% Down
Even though it’s possible to put less than 20% down on a home, there are some major drawbacks — like paying private mortgage insurance and shouldering higher overall costs.
You must pay private mortgage insurance
PMI costs approximately $30 to $70 per month for every $100,000 on your loan, according to Freddie Mac, though that amount can vary. So, with a $300,000 home, you can expect to pay $90 to $210 per month for PMI.
“PMI can make the monthly payment significantly more, and it doesn’t go toward reducing the principal owed on the home,” Aragon says.
Your monthly mortgage payment is higher
Your monthly payment will be more expensive because you’ve put less money down and taken out a larger mortgage, Hammond says. Also, your lender likely will offer less favorable terms, including a slightly higher interest rate, if your down payment falls short of 20%. A smaller down payment increases your risk as a borrower, and lenders offset that with a higher interest rate — which can drive your monthly payment up.
You pay more interest
Here are two examples of how your down payment affects interest paid.
Example A: You buy a home for $250,000 and put down 20% — which is $50,000 — and borrow $200,000. With a 30-year fixed-rate mortgage at 4% interest, your monthly payment is $955, and you spend a total of $143,739 in interest over the life of the loan. The total cost of your mortgage comes to $343,739.
Example B: You put 6% down — which is $15,000 — on the same house. Your loan amount becomes $235,000, your monthly payment increases by $167 to $1,122, and you end up paying $168,893 in interest for a total mortgage cost of $403,893.
The difference in total costs between the two loans is $60,154. Over 30 years, you would pay $25,154 more in interest with the mortgage from Example B. Don’t forget: You’d also have to pay PMI until your principal drops to $200,000 or less.
When It Makes Sense To Put Less Than 20% Down
If you only have enough to make a smaller down payment and can afford the monthly mortgage costs — be sure to account for private mortgage insurance, homeowners insurance, and property taxes — it may make sense to put less than 20% down.
It’s important to have a financial cushion to cover unexpected expenses. So, putting 20% down is risky if doing so will drain your savings.
Buying earlier also starts you sooner on the path to building equity. With market values increasing, waiting could cost you the opportunity to buy now and accrue equity instead of paying rent.
Mortgages With Low Down Payment Requirements
If a 20% down payment seems daunting, know that you have several options. Let’s discuss the minimum down payment requirements for different types of loans.
Minimum down payments for conventional loans
Conventional loans are the most common type. Private banks, credit unions, and other lenders issue conventional loans, of which there are two main categories: conforming and nonconforming.
A conforming loan follows guidelines set by the Federal Housing Finance Agency, which oversees Fannie and Freddie. In addition to requiring a down payment of 20% (or PMI), conforming loans have restrictions on the loan amount, the buyer’s credit score, and more. The minimum you can put down on a conforming loan is 3%.
Nonconforming loans, aka jumbo loans, exceed the limits on conforming loans. Down payment and credit score requirements usually are stricter, though it’s possible to put down as little as 10%.
Conforming vs. Nonconforming Loan Requirements
|Loan Type||Maximum Loan Amount||Minimum Down Payment||Minimum Credit Score|
|Conforming Loan||$548,250, or $822,375 in high-cost areas||3%, or 20% to avoid PMI||620|
|Nonconforming/Jumbo Loan||Varies by lender||10%, or 20% to avoid PMI (can vary by lender)||680 (can vary by lender)|
Minimum down payments for government-insured loans
Some loan types are insured by federal agencies, including the Federal Housing Administration, the Department of Veterans Affairs, and the Department of Agriculture. Private lenders fund these loans, but federal backing allows them to relax some requirements — including down payment minimums. Still, each loan type has its own eligibility guidelines, which also can vary by lender.
Government-Insured Loan Requirements
|Loan Type||Maximum Loan Amount||Minimum Down Payment||Minimum Credit Score|
|FHA||$356,362, or $822,375 in high-cost areas||3.5%||500|
|VA||$548,250, or $822,375 in high-cost areas||0%||N/A|
|USDA||Varies by county||0%||640 (can vary by lender)|
How To Save For a Down Payment
Now that you know the down payment requirements for different loan types, it’s time to get saving. Here are some tips on how to save for a down payment:
- Create a budget. “We’ve noticed that the homebuying process is often the first time that people created a detailed monthly budget for themselves,” Aragon says. “That’s not surprising given that creating budgets is not the most enjoyable activity.” Even so, saving for a down payment is easier if you understand your monthly cash flow, what expenses can be trimmed, and how long it’ll take to reach your goal.
- Cut unnecessary expenses (temporarily). If you’re struggling to come up with ways to save, it’s time to cut down on your discretionary spending. But that doesn’t mean living on a bare-bones budget forever. Look for ways to temporarily reduce monthly expenses, such as pausing your gym membership or downgrading utilities and subscriptions. Once you’re in your new home, you can add back expenses that make sense.
- Reduce or eliminate debt. Another effective way to make room in your budget for down payment savings is to reduce or get rid of existing debt. Whether you have high-interest credit card debt or student loans that eat away at your income, paying them down before starting the homebuying process can help you save more quickly. Plus, you’ll lower your debt-to-income ratio, making it more likely that you’ll be approved for a mortgage.
Down Payment Assistance Programs
If saving for a down payment seems out of reach, there are loan programs that help bridge the gap. Down payment assistance programs are generally administered by states, and often are reserved for lower-income residents, Aragon says.
“The programs provide funds for down payments and closing costs associated with a home mortgage,” she says.
Assistance may come in the form of grants, forgivable loans, deferred-payment loans, and matched savings programs. Check with the Department of Housing and Urban Development or your state housing finance agency to find programs you may qualify for.
You also should ask potential lenders if they offer any assistance programs.
Down Payments for Second Homes and Investment Properties
If you’re interested in buying a secondary residence, such as a vacation home or an investment property, the down payment rules are different. You need a down payment of at least 10% to take out a conventional loan on a second home. If you’re buying an investment property, such as a home that you plan to rent for additional income, you need a down payment of at least 15%.
Down Payment FAQ
Still have some lingering questions about down payments? Here are answers to some of the most common questions.
Averages can be skewed by buyers who put down very large or very small amounts. It’s more helpful to know the median down payment amount. According to a survey commissioned by the National Association of Realtors, the median down payment was 12% for all buyers and 6% for first-time buyers in 2019.
To receive more favorable loan terms and avoid paying private mortgage insurance, it’s a good idea to make a larger down payment if you can afford to do so. However, a larger down payment is riskier if it compromises your savings and other financial goals.
Some government-backed loans, including VA and USDA loans, allow qualified borrowers to put no money down. However, credit score requirements for those loans can vary depending on the lender. For example, USDA loans don’t have a hard credit score minimum, but lenders usually will require a credit score of at least 640.
The Bottom Line on Down Payments
Knowing what percentage to put down on a house for your financial situation depends on several factors, and there’s no one-size-fits-all answer. You must consider how much you can save and how quickly, keeping in mind the overall state of the housing market. It’s also a good idea to crunch the numbers and see how much it would cost overall to put less than 20% down. Depending on your goals, it may be worth putting less down to start financing a home sooner.
Hammond says that regardless of how much you put down, you shouldn’t use up all your savings to buy a home. “You should set money aside for unexpected circumstances or hardships that could come up,” she says.
If you’re unsure about how much money you should set aside for savings versus a down payment, Hammond recommends meeting with a trusted financial advisor, who can walk you through the process.