Before you apply for a mortgage loan, it’s important to have your down payment ready. The more money you can put down on a house, the smaller your monthly mortgage payment will be.
Your down payment amount can also have an impact on other homebuying expenses. For example, if you put down 20% of the home’s price, you won’t need to pay the extra fee for private mortgage insurance (PMI). If you can’t afford to pay that much upfront, you have other options. There are mortgages available for as little as 3% down and, if you’re eligible, no money down.
Read on to determine how much of a down payment you’ll need to buy a home.
What are down payment requirements for a mortgage?
Most people think the average down payment is higher than it really is, which could discourage them from shopping for a home. A survey conducted by the National Association of Realtors found that 35% of consumers think the average down payment is 16% to 20%, and 10% of consumers think it’s more than 20%. But that’s much higher than it really is. The average down payment for first-time homebuyers has actually been around 6% to 7% since 2018. Down payment requirements for a mortgage depend on the type of mortgage you choose.
This chart shows the typical down payment requirement for different loans, but this could vary based on the lender and your qualifications.
| Type of loan | Down payment requirement |
|---|---|
| Conventional | 3% |
| FHA | 3.5% |
| VA | 0% |
| USDA | 0% |
| Jumbo | 10% |
| Important: Keep in mind that if you pay less than a 20% down payment, you’ll likely be required to pay PMI. |
Why a down payment is important
A down payment shows your lender you’re serious about buying a home. It works the same way as putting a deposit down on something you want to buy. The deposit or down payment gives lenders more confidence to lend to you. The larger your down payment, the smaller your monthly mortgage payment will be. If you put down 20% or more, you avoid paying mortgage insurance, which is a fee typically equal to 0.1% to 2% of your loan amount per year.
Let’s say you’re buying a home that costs $400,000. If you put down 3% on a 30-year conventional loan, your down payment would be $12,000, and you would borrow $388,000. At a 7.00% interest rate and a private mortgage insurance rate of 1%, you’d pay $2,904.70 per month (not including homeowners insurance and taxes). After 139 monthly payments, you should have enough equity to cancel the PMI, at which point your monthly mortgage payment would drop to $2,581.37.
If you put down 20%, or $80,000, you would borrow $320,000. With all the other factors above remaining the same, your monthly payment would be $2,128.97.
How to save for a down payment
Saving for a down payment might sound nearly impossible, but there are a few simple ways to make it more manageable.
Recent findings from RealtyHop reveal it could take anywhere from a handful of years to over a decade to accumulate enough savings to put down 20%. The exact length of time is dependent on location and home prices.
According to this study, homebuyers in Detroit could typically save up for a down payment in under three years, while those shopping in Glendale, California, could expect to save for approximately 15 years. Where you choose to settle down can make a big difference in terms of affordability. And while these timelines may sound extreme, making smart financial moves can translate to big savings. Here are some tips to get started:
- Pay yourself first: You can do this by putting away a certain percentage of each paycheck in an interest-bearing savings vehicle. Once you get used to living with a smaller paycheck, you might not even notice the difference, and you have the bonus of watching your savings grow each month.
- Tell your family and friends that your goal is to buy a house: When it’s your birthday or a holiday, you can ask for a contribution to your down payment fund, in lieu of a present.
- Sell investment assets: Some homebuyers sell stocks or bonds or use their work retirement fund to get cash.
- Ask for down payment gift money: If you have a generous family member willing to cover a large portion of your down payment, consider making the request. Many lenders allow this as long as the money is indeed a gift, and not a loan.
FAQ
What are the benefits of a larger down payment?
A larger down payment gives you several benefits:
- It brings down your monthly mortgage payment.
- If it’s 20% or more, you save money by not paying for mortgage insurance.
- Your lender might offer you a lower interest rate since the larger the down payment, the less risk the lender takes on.
- You might be able to buy a more expensive house.
- You’ll have a lower debt-to-income ratio. This becomes important if you want to take out other loans, like for a car or a second home.
When is a down payment paid?
The down payment is due and paid at closing, but you’ll need the money before then. You’ll need to show your lender that you have the funds before you’re approved for a loan. Also, many sellers and real estate agents will want to see that you’re pre-approved for a mortgage loan before they’ll work with you. So even though you don’t need to pay your down payment until closing day, you’ll need to have it in the bank before you start the homebuying process.
Note that you may need to put some money down shortly after you get under contract on a house (once you’ve made an offer and it’s accepted). This is called earnest money, which is typically 1% to 3% of the home’s price, but may be higher in a competitive real estate market. This money sits in an escrow account and goes toward your down payment at closing. Note that you could lose your earnest money if you back out of the house for reasons not covered by a contingency. Typical contingencies buyers ask for are inspection, finance, and appraisal.
What are some low- or no-down-payment options?
There are some advantages to making a smaller down payment. You may be able to get into a home sooner by not waiting until you have 20% or more saved. You’ll also have more money to use for house repairs and renovations if necessary. If you want or need a low- or no-down-payment option, you have some choices. Some conventional lenders might offer low- or no-down-payment options. And the government offers assistance for first-time or low-income borrowers through several programs:
- FHA loan: FHA stands for the Federal Housing Administration. The FHA loan program offers low down payment options and closing costs, making it a great choice for homebuyers who have had employment or credit issues and require more flexibility. You just need to stay within the FHA mortgage limits, which vary by county. Also, every state has a State Housing Finance Agency (HFA) that makes it possible for low- and middle-income households to buy affordable homes.
- VA loan: These loans are backed by the Department of Veterans Affairs. This program offers mortgage loans with no down payment. To qualify, you must meet the minimum active duty service requirement.
- USDA loan: These loans are offered through the Department of Agriculture. Loans are available without a down payment. You would need to buy a home in a designated rural area to qualify.