How Much Is a Down Payment on a House?

In This Article

If you’re buying a home, there are many things you need to figure out before you make the leap to homeownership. A big obstacle to consider when you want to buy a house is your down payment. The amount you need to put down on the house depends on several factors. 

We’ve created this guide to help you understand how down payment requirements affect your mortgage payments and how much you’ll need to put down on a house based on the type of loan you get.

What Is a Down Payment?

A down payment is a cash payment that’s due at the onset of the purchase of an expensive good or service, such as a new car or home. The down payment represents a percentage of the purchase price and is paid by the buyer at closing.

That said, a down payment is not the whole amount that will need to be settled with your title company at closing time. In fact, you may elect to pay closing costs too. Closing costs are the fees due when finalizing a mortgage, typically used to cover the costs of filing paperwork. Sometimes closing costs are paid by the seller or split between both parties. This is something that can often be negotiated, depending on the deal.

How Much Down Payment Do You Need to Buy a House?

In the past, homebuyers typically agreed to pay a down payment of 20% of the home’s purchase price when using a conventional loan, and some lenders still prefer this down payment amount. However, in today’s real estate market, many people put down less than 20%, even with conventional loans. This is partly due to the increase in home values, which makes saving for a down payment more challenging, especially for first-time homebuyers.

A typical down payment to buy a house nowadays can be much lower than 20%, and in some cases, you may be able to find a loan with zero down. According to the National Association of Realtors, most first-time homebuyers put 6% or 7% down. The amount you need to put down to buy a house depends largely on the type of loan program you’re using and the mortgage lender providing the loan amount.

What Is the Minimum Down Payment Required for Buying a House?

While buying a home with a 20% down payment is preferred by some lenders, your down payment may vary, depending on the purchase price you pay for the house and who is providing the loan. For example, Federal Housing Administration (FHA) loans may only require a 3% to 3.5% down payment, the minimum down payment you’ll likely find. This signifies the minimum down payment you agree to pay as part of the purchase.

Of course, the minimum down payment you make when buying a home can be anywhere between the highest down payment amount of 20% and the lower end of 3%. Although zero-down loans exist, they’re typically only available to low-income buyers using federal government-backed loans such as a VA loan or a USDA loan.

When you make a smaller down payment or put no money down, you’ll have to have private mortgage insurance (PMI). Mortgage insurance is a way for mortgage lenders to protect themselves in case homebuyers default on their loans. To avoid mortgage insurance, buyers need to put more money down.

Can You Buy a House With No Down Payment?

You can find loans that require no money down. The Department of Veterans Affairs offers VA loans with zero down to veterans who can’t afford a down payment. USDA loans can also come with a zero down payment requirement. These types of loans have strict guidelines that need to be met in order to qualify. If you don’t qualify for this type of mortgage, you can expect to pay at least 3% to 3.5%, which is the amount that most mortgage loans require.

What Are the Pros of Making a Bigger Down Payment?

These are some of the benefits associated with making a larger down payment that you should be aware of:

Paying less for your house

Interest on your mortgage is simple interest, meaning your interest is not compounded or cannot gain interest on itself. Still, by agreeing to pay a larger down payment, you effectively reduce the loan amount and how much you will ultimately pay for the home.

This example shows how putting different amounts down can lower your overall monthly payment for your home, assuming you’re taking out a $250,000 loan. In the example, we use a 30-year fixed-rate loan of 5% to illustrate how down payments can affect mortgages.

Taking out a loan for $250,000 would leave you with a mortgage payment of $1,342 per month. Over the life of that loan, if you make your monthly mortgage payments on time and put nothing else toward the loan’s principal, you would end up paying $483,139.

The table demonstrates loan amounts with 5%, 10%, and 20% down payments.

Depending on how much down payment you make, you would save $24,157, $48,313, or $96,627, respectively. That is almost a 100% return on your investment.

Lowering your interest rate

Mortgage lenders are more likely to give you a better mortgage interest rate when you put down 20% of a home’s purchase price, compared to 5%. The more interest you have on your loan, the more money you pay over the life of the loan. So having a substantial down payment is the best way to reduce your interest rate.

Reducing your monthly mortgage payment

It doesn’t take a math whiz to realize that when you agree to pay a larger down payment, it results in lower monthly mortgage payments, and you’ll end up paying less interest on the loan balance. When comparing a 5% and 20% down payment on a $200,000 home, you can easily see that the higher down payment lowers monthly mortgage amounts significantly.

Increasing the chance of your offer being accepted

This one may be a little more mythical than numerical, but it still carries weight. When faced with the decision between two offers on their home, where the only difference is the amount of the down payment, a seller is much more likely to choose the offer with the higher up-front payment. This is because the buyer putting down more looks more credible in the seller’s eyes and is less likely to have problems throughout the loan process.

This is even more true when looking to purchase a home in a competitive market at a competitive price point. Also, because a conventional loan often requires a more substantial down payment, sellers may prefer a buyer with a conventional loan over one using a VA loan or a USDA loan that doesn’t require any down payment.

What Are the Pros of Making a Smaller Down Payment?

Here’s a list of pros to consider if you’d like to make a smaller down payment on a house:

Getting into a home faster

Saving to buy a home is difficult. It can be very slow going and painful.

When trying to purchase a home, the last thing you want to do is wait years to build up enough in a savings account for a large down payment. By making a lower down payment, you will be able to get into a home sooner than if you wait until you have enough money in the bank for a significant down payment.

Leaving more in savings

By putting less money toward your down payment, you’ll be keeping more funds in your savings account. This means that if anything were to happen to your income stream, you wouldn’t be at risk of defaulting on your home loan.

Additionally, having an emergency fund allows you to make repairs and improvements to a new home without putting you in a tight financial situation. Keep in mind that there’s more to buying a house than your monthly payment, so be sure to budget for expenses like homeowners insurance, property taxes, and utilities when deciding how much you can afford to spend on a house.

How Much Should You Put Down When Buying a House?

The answer to this question is not cut-and-dried. How much you need to put down on a home depends on the loan product that you’re trying to use and how much house you want to buy. VA loans or USDA loans offer no-money-down options. If you don’t qualify for one of these government agency loans, a down payment on an FHA loan can be as little as 3.5%. To qualify for the lowest down payment, you’ll typically need a minimum credit score of 580.

The average down payment most homebuyers make can be anywhere from 8% to 20%. However, you may have to raise your down payment if the contract price of a home rises. Certain types of loans may have higher down payment amounts. Jumbo loans, which fall outside the conforming loan limits of the Federal Housing Finance Agency, have a minimum down payment requirement of 10%.

You should also consider mortgage insurance, which lenders require when you don’t have at least 20% equity in a home. If your down payment is less than 20%, you’ll need to pay this, which adds to your monthly payments.

When thinking about how much you need to have for a down payment, consider:

How much do you have saved?

The last thing you want after spending your savings on a down payment is to get settled into your home and then have an emergency happen you can’t afford. In this case, putting 20% down is probably not the best choice. 

Instead, you should probably take on PMI and work toward getting to that 20% equity mark, which lets you off the hook for private mortgage insurance. When you have more equity in the home, you may be able to refinance your loan to get lower monthly payments.

How long are you planning to live in the home?

The longer you plan on staying in the home, the more valuable each dollar of the down payment becomes. If you plan on living in the home for less than 10 years, making a larger down payment may not be the best choice. On the other hand, making a big down payment can give you more equity in the home sooner.

Are you an active real estate investor?

With low real estate market mortgage interest rates, your down payment does not gain the greatest return on its money. That said, investing in real estate is a guaranteed return on your money that you can’t get from other investments. Making at least the median down payment can decrease your loan amount and put more money in your pocket when you sell.

What size monthly mortgage payment can you support?

If you have a lot of money saved for a down payment but not enough for a higher monthly mortgage payment, putting more savings down is a good idea. This is especially true if putting more down is going to save you from needing mortgage insurance, a fee that adds to your monthly payments.

How does your credit score factor into your down payment?

Your credit score will affect the interest rate you will be approved for, but it might also affect how much you need to put down.

If you’re applying for an FHA loan and have a credit score over 580, you should be able to qualify with only a 3.5% down payment. However, those with credit scores under 580 who can qualify for a government agency loan will have to put down 10%.

How to Pay Your Down Payment

The most common ways of paying a down payment at closing are with checks, money orders, or wire transfers. Some people use a HELOC (home equity line of credit), a 401(k), or even a credit card, though this method isn’t recommended.

Unfortunately, not everyone will be able to save enough money to put toward the down payment on a new home. There are some unusual down payment options to consider, such as getting the down payment as a gift from a friend or relative. Before accepting a gift of money for a down payment, consider the following:

Can down payments be a gift?

While you can accept a down payment gift, there are some issues with this option that you’ll want to be aware of, even though they mainly apply to the gifter, not the giftee.

Just getting accused of committing mortgage fraud is bad, but actually committing it is far worse. Pay attention to what’s legal and what’s not when it comes to receiving a down payment as a gift.

One requirement is that you’ll need to have a signed letter confirming your relationship with the person gifting you the down payment stating that it is, in fact, a gift. You aren’t allowed to repay the gift because that would be regarded as a loan and may be considered mortgage fraud.

Another thing you need to do is get the money well ahead of time. Banks want to be able to trace the money being gifted to you for your down payment. They do this to ensure it’s coming from a legitimate source. In most circumstances, you can receive a gift for the full amount of your down payment.

Is there a tax benefit to the down payment gift-giver?

The gift-giver could incur an extra gift tax from the IRS if they were to go over the annual exclusion amount for a gift. In short, as long as you aren’t gifted more than $17,000 as an individual or $34,000 as a joint tax-filing couple, the person giving you the down payment will not be hit with a gift tax.

How much is the gift tax?

The gift tax can make things a little convoluted. This is because there is another piece of the puzzle called the lifetime gift tax exemption, which is a number, currently $12.92 million, that you can gift in your lifetime.

The lifetime exemption doesn’t come into play as long as you stay under the annual gift exemption amount. If you exceeded the annual allowable gift amount, the overage would be deducted from your lifetime gift total, leaving you with less than you can gift without paying tax on it.

How can you use crowdsourcing as a down payment alternative?

With platforms like Kickstarter and Indiegogo becoming so popular, it’s no wonder crowdsourcing has made its way into the home purchasing space. Some popular sites where you might be able to crowdsource your down payment are HomeFundIt and Feather The Nest. These sources allow you to raise money for a down payment without having to ask people you know for help.

What Is Down Payment Assistance?

When buying a home, there are programs designed to help you with the down payment. This is called down payment assistance.

Each state has its own separate entities that take care of down payment assistance programs. These programs can vary depending on the real estate market and the availability of funds. Less-populated states have fewer programs, while other far more-populated states have many more loan programs.

How do you qualify for assistance?

The exact rules for how to qualify depend on the state you live in and the program you’re applying for. Some programs cater to specific groups, such as first responders, nurses, or veterans. Other programs care only about how much money you bring in annually. To find out if you qualify, research the programs your state offers.

Do you have to be a first-time homebuyer?

You do have to be a first-time homebuyer to qualify for most of the programs that offer assistance with down payments. Fortunately, according to the Department of Housing and Urban Development (HUD), being a first-time homebuyer just means that you haven’t owned a primary residence within the last three years.

If you owned a home that you sold five years ago, for example, and have been renting ever since, you would be classified as a first-time homebuyer and qualify for many assistance programs designed to help you buy a home.

Find the Right Down Payment For Your Investment Strategy

Answering the question of how much should you put down on a home isn’t easy. You need to account for many variables to make the best decision for your specific needs. 

Now that you know a little more about down payments, you can make a more informed decision about the type of loan you want and the down payment it will require.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.