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How Much Should You Put Down on a Home?

how much to put down on a home

A down payment is a common expense when purchasing a home. Still, more than a third of Americans overestimate the minimum down payment required to qualify for a mortgage, according to research from Fannie Mae.

Your down payment is a lump sum of cash paid upfront when you close your home loan. It plays an important role when you purchase a home because lenders use it as evidence that you’re willing to put some skin in the game. Whatever you don’t cover with your down payment, you’ll finance through your lender.

Whether you’re having trouble saving for a big down payment or sitting on a mound of cash and you’re hesitant to put all your eggs in one mortgage basket, we’ll cover everything you need to know about how much to put down on a house.

How to decide on a down payment

How much do you have to put down on a house? That depends on the purchase price of your home, your loan program and your credit score. Different loan programs require different down payment percentages, but it’s possible to get a mortgage with as little as 3% down.

The average down payment for a house is 13%, according to the National Association of REALTORS.

Let’s take a look at several down payment percentages and translate them into dollar amounts. We’ll use a home with a $250,000 price tag:

Your down payment percentage doesn’t just influence how much you’ll need to borrow. It also impacts:

  • Your mortgage interest rate
  • What type of mortgage program is best for you
  • Whether you’ll pay for mortgage insurance

The more money you put down, the better. Your monthly mortgage payment will be lower because you’re financing less of the home’s purchase price, and you can possibly get a lower mortgage rate. Still, you’ll want to think critically about how much you contribute toward your home purchase. You’ll also have closing costs, which can range from 2-5% of the home price. So on a $250,000 house, your closing costs could be $5,000 or more.

There’s also your emergency fund that needs to stay intact after your home purchase. Aim to have three to six months’ worth of living expenses saved. Unexpected expenses will pop up once you become a homeowner, and you’ll want to have the security of savings to help you cover those costs.

Should I put down 20%?

The 20% down payment rule comes from guidelines set by Fannie Mae and Freddie Mac, two major mortgage agencies backed by the federal government that buy and guarantee most of the mortgages made in the U.S. In the case of a $250,000 home, a 20% down payment would be $50,000.

To conform to Fannie and Freddie guidelines for a conventional mortgage, a homebuyer must either put down at least 20% or pay for private mortgage insurance (PMI), which is a policy that protects the lender if you default on your mortgage payments. PMI is usually paid monthly as part of your mortgage payment.

A 20% down payment is considered the gold standard, and there are some pretty convincing arguments for putting down that chunk of change.

Benefits of a 20% Down Payment Drawbacks of a 20% Down Payment
  • No private mortgage insurance: When you make a 20% down payment, you avoid paying PMI, which would’ve been added to your monthly mortgage payment. PMI typically range from $30 to $70 a month for every $100,000 borrowed.
  • Lower overall costs: A bigger down payment means you’ll borrow less and have a smaller, more affordable monthly mortgage payment. You may also be eligible for a lower interest rate. Lenders often charge less interest for a loan with 20% down than they would for a loan with a smaller down payment. Over the course of a 30-year loan, a lower interest rate can save you thousands of dollars, depending on how much you borrow.
  • You can’t get your money back (easily): When most of your liquid assets go toward a down payment, that money will be tied up in the house. Although having equity in the home is a good thing, if you experience a job loss or another financial event that leaves you needing cash, it’s not easy to get your money back without borrowing against your equity or selling your home.
  • Your investment is at risk: People tend to think of buying a home as an investment. But like most investments, buying a home comes with risk. If you put 20% down and your home’s value drops, you could wind up with no equity in your home when you’re ready to refinance or sell.

Should I put down more than 20%?

Although 20% is often recommended as an ideal down payment amount, you have the option to put down more. But if you have that kind of money available, does that mean you should do it?

The upside of a larger down payment is that you’ll start out with a significant amount of equity and you avoid PMI. You also may be able to negotiate lower closing costs.

But before you empty your savings account, consider the potential downsides to making a bigger down payment:

Low or no cash reserves

Putting all your savings toward a down payment may not leave you any money in the event of an emergency. Job loss, serious medical issues, significant home repairs and other financial surprises could happen before you’ve had time to rebuild your emergency fund. Without any cash reserves, you may have to rely on credit cards, tap into your retirement savings or sell the home to cover unexpected expenses.

Competing financial goals

There are typically trade-offs with competing financial goals when you’re saving up a large down payment amount. To come up with a down payment larger than 20%, you may have forgone or cut back on contributing to your 401(k). Or perhaps you have existing credit card debt or other loans you haven’t been paying off aggressively because you were saving for a down payment.

In this case, it’s a good idea to balance saving for a down payment with other financial priorities, such as boosting your retirement funds and paying down debt.

What happens if I put down less than 20%?

The best way to fully understand how your down payment affects your home purchase is to run the numbers.

Let’s take a look at two buyers who are borrowing conventional loans, each with excellent credit scores. They’re both buying a home valued at $250,000 on a 30-year, fixed-rate mortgage.

Kate is making a 20% down payment and is eligible for a 3.75% interest rate. Steve is putting down 5% and receives a 4% interest rate.

Comparing a 20% and 5% down payment

Kate Steve
Home price $250,000 $250,000
Down payment $50,000 $12,500
Mortgage amount $200,000 $237,500
Interest rate 3.75% 4%
Monthly mortgage payment
(Principal and interest)
$926.23 $1,133.86
Monthly PMI payment $0 $123.70
Total interest paid over 30 years $133,443.23 $170,690.08
Total PMI paid until 80% LTV $0 $11,875.20*

*Estimate based on PMI removal after 8 years of payments.

In this example, Kate was able to save nearly $50,000 ($37,246.85 in interest and $11,875.20 in private mortgage insurance payments) over the course of a 30-year loan by putting 20% down.

If you decide to put down less than 20%, the actual amount you pay for PMI will depend on several factors, including your down payment percentage, credit score and mortgage type. Once you reach 20% equity, which means you have an 80% loan-to-value (LTV) ratio, you can request that your lender remove PMI from your loan. Otherwise, PMI will be automatically canceled when you build 22% equity (78% LTV ratio).

FHA mortgage borrowers have something similar to PMI called a mortgage insurance premium (MIP). There’s an upfront premium paid at closing that costs 1.75% of the loan amount and an annual premium that is divided by 12 and paid as part of the monthly mortgage payment. The annual premium cost ranges from 0.45-1.05% and depends on your down payment, loan amount and mortgage term. MIP stays in place for the life of the loan unless the borrower puts down 10% or more.

Homebuyers seeking a mortgage backed by the U.S. Department of Agriculture (USDA) or Department of Veterans Affairs (VA) won’t pay mortgage insurance, but they’ll have upfront fees instead. VA loans have a funding fee that is typically added to the loan amount. The amount you pay depends on how many times you’ve used the loan program. USDA loans also have a guarantee fee that is capped at 3.5% of the loan amount — it is rolled into the loan — and an annual fee that is capped at 0.5% of the loan amount.

Low down payment mortgage options

With the median price of a new home in the U.S. over $310,000, it’s not surprising that many people have a hard time coming up with 20% down. Fortunately, whether you just don’t have that much cash or would prefer to put your money to work elsewhere, there are options available.

Here’s an overview of some of the best low down payment mortgage programs.

  • FHA: The minimum required down payment for an FHA loan is 3.5%, and the minimum credit score is 580, in most cases. If your credit score is between 500 and 579, your minimum down payment is 10%.
  • HomePossible®: Freddie Mac’s Home Possible® conventional mortgage requires just a 3% down payment. Conventional loans often require a 620 credit score, though it’s possible to qualify for a HomePossible® loan without a credit score.
  • HomeReady®: Fannie Mae’s HomeReady® loan program also has a 3% minimum down payment. The minimum required credit score is 620.

Can I put zero money down and still get a mortgage?

There are a couple of no-money-down mortgage programs available — both of them backed by the federal government.

  • USDA loans: The USDA offers 0% down payment loans through its Single Family Housing Direct and Single Family Housing Guaranteed loan programs. Homebuyers must buy a home in a designated rural area. Most USDA lenders expect to see a 640 credit score.
  • VA loans: Military service members, veterans and eligible surviving spouses can get a VA loan with 0% down. While there is no required minimum credit score, many lenders have a 620 score cutoff.

Things to consider when making a smaller down payment

It could take you several years to save up a 20% down payment to buy a home. If that doesn’t sound reasonable, a smaller down payment may make the most sense for you. However, factor in the following considerations:

  • Your mortgage rate: Lenders will consider you a riskier borrower because you’re contributing less toward your home purchase and financing a larger percentage of the home price. Your mortgage interest rate will likely be higher as a result, but you can keep your rate somewhat lower by having a higher credit score. A 740 score or higher can help you qualify for a better rate.
  • Mortgage insurance: Your monthly mortgage payment will be higher because of the added cost of mortgage insurance. If you borrow a conventional loan, you can eventually drop PMI, as previously mentioned. But if you have an FHA loan, you must pay annual MIP for the life of your loan unless you refinance into a conventional loan. Even still, you’ll need at least 20% before you refinance to avoid mortgage insurance on your new loan.
  • Interest payments: The larger your loan, the more you’ll pay in interest. You can cut down on the interest you pay by making extra mortgage payments and even recasting your mortgage if you receive a financial windfall later.

Down payment assistance programs

If you need extra help coming up with down payment funds, you may find that your state or county offers down payment assistance programs. Check with your local housing agency for more information. Here are a few examples.

Good Neighbor Next Door

The Good Neighbor Next Door program from the U.S. Department of Housing and Urban Development (HUD) is available to law enforcement officers, teachers, firefighters and emergency medical technicians buying homes in certain communities designated as revitalization areas.

The program offers eligible borrowers 50% off the list price of the home if the borrower commits to using a property in one of these communities as their sole residence for three years. Eligible buyers can purchase a home with as little as $100 down.

Borrowers don’t have to be first-time homebuyers to take advantage of the program. However, they can’t own any other residential property at the time they submit an offer to purchase a home, or for one year prior.

Eligible borrowers should first get preapproved for a loan through the FHA. Then, check listings in your state to find an eligible property. Follow the instructions to indicate your interest in a specific home.

Operation Hope

The Operation Hope Homeownership Program helps low-income individuals access funding for homeownership without resorting to subprime loans.

The program is available at all HOPE Inside locations in 22 states and Washington, D.C. It includes a homebuying workshop and HUD-approved housing counseling to help borrowers overcome bad credit and other potential barriers to homeownership.

National Council of State Housing Agencies (NCSHA)

Many state agencies and nonprofit organizations have programs aimed at helping potential homebuyers get approved for a mortgage. Locate the resources in your area by using the NCSHA directory.

Available programs vary by location, but they typically provide competitive interest rates, low or no down payment programs and closing costs assistance. They may also be able to connect you with government-backed or conventional loans that fit your circumstances.

The bottom line

Choosing the right down payment amount involves evaluating your financial situation to make sure you’re contributing as much as you can without emptying your savings account.

First, determine how much you have available for upfront expenses, including your down payment and closing costs. Make sure you’ll still have some savings left over for emergencies and other goals.

Next, talk to multiple lenders to find out what mortgage programs and interest rates are available based on a review of your credit, debt and income. Apply for a mortgage preapproval to get a better understanding of the loan amount and interest rate you may qualify to receive.

Finally, run the numbers using a mortgage calculator to see how much you’ll save or spend with a smaller or larger down payment. If you don’t have enough savings to afford the down payment you need, consider applying for a down payment assistance program.

Not everyone needs a big down payment to buy a home, and some people don’t need any down payment at all. Explore your options, speak with lenders and compare costs to make the best, most-informed choice.

 

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