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How Much is a Down Payment on a House?
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If you’re in the market to buy a home, pinpointing how much is a down payment for a house can be difficult. The reality is some mortgage programs require little to no down payment at all, but the long-term costs of putting down less money may outweigh the benefits.
Let’s explore the ins and outs of what a down payment is and how much you should put down.
- What is a down payment?
- How do down payments work?
- Minimum down payment requirements
- How much should you put down on a house?
- How to buy a house without a down payment
What is a down payment?
A down payment is upfront money paid to purchase a home. If you need a mortgage, lenders typically require you to pony up at least 3% to 3.5% of the sales price — that may come as a surprise to many who still mistakenly think lenders require a 20% mortgage down payment.
In 2019, the median down payment was 12%, according to the National Association of Realtors, meaning buyers came up with $12,000 for every $100,000 of home purchased.
A down payment on a house is the first step to building home equity. Each mortgage payment reduces your loan balance. As your home’s value grows, so does your home equity. You can pocket the equity in cash when you sell your home or tap it to make home improvements while you still own it.
How do down payments work?
Down payments have a direct impact on your monthly payment and the costs associated with your loan. Closing costs are typically 2% to 6%, depending on your loan amount. In other words, the more you borrow, the more you pay to close your loan.
The chart below shows the difference between a 20% down payment on a conventional loan and a minimum down payment for both a conventional loan and a mortgage insured by the Federal Housing Administration (FHA). All loan terms are for 30 years with a fixed interest rate of 3.75% to buy a $250,000 house.
|Down Payment Percentage||Down Payment Amount||Loan Amount||Principal and Interest Payment||Mortgage Insurance|
|3% conventional||$7,500||$242,500||$1,123.06||$126.30/month PMI|
|3.5% FHA||$8,750||*$245,472||$1,117||$171/month MIP|
*Base loan amount $241,250 plus $4,222 for FHA’s upfront mortgage insurance premium (UFMIP)
Here’s a summary of the costs and savings of each down payment option:
|Down Payment Percentage||Cash Savings||Monthly Payment Savings||Home Equity at Purchase||Closing Costs of 2%|
|20% conventional||N/A||$323.13 to $361.77||$50,000||$4,000|
|3% conventional||$42,500||$38.64 vs. FHA||$7,500||$4,850|
*Financed FHA mortgage insurance reduces starting home equity
The higher down payment saves you more than $300 per month on your mortgage payment, but takes over $40,000 out of your savings account. A lower down payment leaves you with more cash on hand at the expense of a heftier monthly payment and less equity in your home at closing. A smaller down payment also costs you an extra $850 to $909.44 at the closing table, assuming the fees are 2% of your loan amount.
Down payments and mortgage insurance
Another drawback to a low down payment is mortgage insurance. Mortgage insurance protects lenders against losses if you default, and is usually added to your monthly payment if you make less than a 20% down payment.
Conventional mortgage insurance is called PMI — short for private mortgage insurance — and you can get rid of it once you have 20% equity. Government-backed loans insured by the Federal Housing Administration (FHA) require two types of mortgage insurance: MIP and UFMIP. The upfront mortgage insurance premium (UFMIP) is 1.75% of your loan amount financed into the loan. The mortgage insurance premium (MIP) is charged annually, divided by 12, and added to your monthly payment. Unlike PMI, MIP typically lasts for the life of the loan.
How much a down payment impacts what you can afford
Down payments have an impact on how much home you qualify for. The Consumer Financial Protection Bureau (CFPB) recommends total monthly debt at or below 43% of your before-tax income, known as the debt-to-income ratio (DTI). The chart below shows how a down payment on a house affects the price of the home with a $65,000 annual salary and $750 in monthly bills.
|Income||Down Payment||How Much House You Could Afford*|
*Assumes $3,640/year property taxes and $800/year homeowners insurance
Minimum down payment requirements
There are a number of loan programs with low or no down payment options. However, low down payment options are for primary homes only. If you’re purchasing an investment property or a second home, minimum down payment requirements are higher.
Different minimum down payments by loan type
The table below reflects the smallest down payment possible with each loan program, as well as unique qualifying hoops you might need to jump through.
|Loan Type||Minimum Down Payment Requirements||Special Qualifying Requirements|
|Conventional Non-government loans with guidelines set by Fannie Mae and Freddie Mac||3% for a primary residence 10% for a vacation home 20% for an investment property*||Income limits may apply for 3% programs 15% for 2-unit properties 25% for 2-4 unit properties|
|FHA Government-backed loans insured by the Federal Housing Administration||3.5% down payment with 580 credit score 10% down with 500 to 579 credit score||Loan amount limits apply|
|VA Loans guaranteed by the U.S. Department of Veterans Affairs||0%||Must be active-duty service member, veteran or an eligible spouse|
|USDA Guaranteed by the U.S. Department of Agriculture||0%||The home must be in a USDA designated rural area Income limits may apply|
|Jumbo Higher loan amounts above maximum conforming limits||15%-20%, but some lenders may go as low as 5%-10%||Lenders may have additional qualifying requirements|
Where your minimum down payment can come from
You can gather down payment funds from a variety of different sources. Lenders will accept any of the following, or a combination of such:
- Savings and checking. Lenders review the current and average balance in each account for the last two months.
- Gifts. You can get a gift from family and friends, as long as they are willing to show the account the funds are coming from. A gift letter needs to be completed confirming you don’t have to repay the money.
- 401(k) loan. Some retirement and 401(k) accounts allow you to borrow or withdraw money with no penalty to buy a home. Check with your financial advisor or employer to get details about options.
- Sale of assets. Selling a car or other assets to stockpile down payment cash is acceptable, but additional documentation is usually required.
How much should you put down on a house?
Your down payment decision really comes down to your financial needs and wants. If you have a significant amount of money saved up, the choice revolves around whether you should pay extra now to realize a bigger return on your home investment dollars later.
A bigger down payment may:
- Result in a lower monthly mortgage payment
- Allow you to qualify for a more expensive home
- Lower your interest rate
- Reduce or eliminate mortgage insurance costs
- Lower your total closing costs
- Give you more equity upfront
A smaller down payment may:
- Leave you with more cash in the bank
- Allow you to put cash into investment funds that may have a higher return
- Give you a financial cushion for repairs or an emergency fund
- Increase the amount of mortgage interest you can write off if you itemize your deductions
How to buy a house without a down payment
A down payment assistance program may be available in your area if you don’t have enough cash to put down. Read the fine print for terms that restrict how long you have to stay in the home to avoid having to repay the assistance. Here are some options to buy a house without a down payment:
- State and local down payment assistance programs. Check with your local or state housing authority or local housing nonprofits to find out what type of homebuying assistance they offer. Funds are usually limited, and typically only low- to moderate-income buyers are eligible in specific areas.
- Special grants. Money may be available to buy homes in neighborhoods the local government is trying to revitalize.
- Employer-based assistance. Emergency medical workers, law enforcement professionals and recent college graduates may have access to special down payment and closing cost programs.
- HUD homes. FHA foreclosed homes can be purchased with down payments as low as $1. Check the HUD Homestore to find out what’s for sale in your area.
- Special lender zero-down programs. Banks and mortgage lenders periodically offer special no-down payment loan programs. Check with local loan officers to see if you’re eligible.