Your down payment is the amount you pay upfront to purchase a house. Most people think they need to put down 20%, but many loans allow you to pay less than that.
While you can purchase a home with a down payment under 20%, doing so may increase the overall cost of homeownership. There are a few factors to consider when you're determining how much to put down on a house.
- A down payment reduces the amount you borrow to purchase a house.
- The often-advised 20% down payment allows you to avoid paying private mortgage insurance (PMI) but it isn't required.
- A lower down payment allows you to purchase a home sooner but results in a higher monthly payment.
- Down payment assistance programs through your lender or a state agency can help you purchase a home with a low down payment.
How Much House Can You Afford?
Calculating how much to put down depends a great deal on the purchase price of the home. If you're shopping for a $250,000 home, 20% down would be $50,000. But if you're shopping for a $600,000 home, 20% down would be $120,000—nearly two and a half times as much. That's why it's important to know how much house you can afford overall.
Since your lender might approve you for more than you're actually willing to spend, use a few guidelines to calculate how much home you can afford. For instance, review your budget, and target a figure that will cap your monthly mortgage payment at no more than 28% of your income. If you're already carrying significant debt (such as student loan debt) this figure would be lower.
Many financial experts advise you not to spend more than 36% of your income on debt. This helps ensure that you have enough money left over each month to reach other financial goals.
How Your Down Payment Affects Your Mortgage
A down payment has a big impact on a mortgage, including the type of loan you qualify for, your interest rate, and the cost of the loan.
At a minimum, you can pay 3% down. Government-backed mortgages from the Federal Housing Administration (FHA) allow you to pay just 3.5% down, and with a lower credit score.
Making a higher down payment generally means your loan will be less expensive because your down payment affects your interest rate and the amount you borrow. Your monthly payments will be lower, and you'll pay less interest over the life of your loan. With a bigger down payment, you'll have more equity in your home, which can protect you if home values go down.
It may be easier to buy a house with a smaller down payment, but your monthly payment will be higher, and you'll pay more in interest over the life of the loan. Depending on your budget, you may have to purchase a less expensive home so that your monthly payment is more affordable.
Compare Putting 5% and 20% Down
We used a mortgage calculator to compare down payments for a $300,000 home purchase in the table below. Use it to see how much you could put down on a house and what the results would be. Note that the total monthly payment includes PMI, insurance, and property tax.
|5% of Purchase Price||20% of Purchase Price|
|Interest Rate (fixed)||4.00%||4.00%|
|Mortgage Payment (Principal and Interest)||$1,361||$1,146|
|Total Monthly Payment||$2,050||$1,657|
|Total Mortgage Paid||$489,828||$412,487|
Put 20% Down To Avoid PMI
Many lenders will require you to purchase private mortgage insurance if you're paying less than 20% down, which increases the overall cost of the loan. This additional insurance protects the lender—not you—in case you're not able to make payments on the loan. By paying for mortgage insurance, you're reducing the lender's risk which gives them more flexibility to loan money to you.
You'll typically pay PMI monthly with your mortgage payment until you reach 78% equity in your home, although some mortgages charge PMI as an upfront premium due at closing.
The median down payment was 12% for all homebuyers and 6% for first-time homebuyers, according to a 2020 report from the National Association of Realtors. For first-time homebuyers paying 6%, that would mean a down payment of $18,000 on a $300,000 home.
Put Less Down With Low Down Payment Programs
Several programs allow you to purchase a home with a low down payment.
FHA loans are partially guaranteed by the government and allow homebuyers to get approved with a down payment as low as 3.5%. You'll have to pay FHA mortgage insurance regardless of your down payment. This adds 1.75% to the upfront costs and requires monthly premiums.
Homebuyers with low credit scores and low down payments are better candidates for FHA loans. On the other hand, buyers with higher credit scores and bigger down payments, that is, more than 10%, may save money with a conventional mortgage.
You can apply for an FHA loan with an FHA-approved lender. The lender will be able to give you more details on loan terms and qualifications.
The U.S. Department of Agriculture (USDA) guarantees home loans for low- and moderate-income households living in rural areas and doesn't require a down payment. Homebuyers must live in a USDA-eligible area, must make below 115% of the median household income in the region, and must have difficulty getting a conventional mortgage without private mortgage insurance.
There are no credit score requirements and homebuyers must apply with a lender within the USDA's network of approved lenders.
Qualified members of the U.S. military, including active duty, veterans, and eligible surviving spouses, can apply for home loans that are backed by the U.S. Department of Veterans Affairs. VA home loans offer 100% financing, low interest rates, limited closing costs, and no private mortgage insurance.
While the VA doesn't require a down payment, some lenders may require down payments, depending on the size of the loan. You can apply for a VA loan with your preferred lender after obtaining a Certificate of Eligibility (COE) either through the VA's eBenefits website or by mail.
Fannie Mae and Freddie Mac
Fannie Mae and Freddie Mac, the government-sponsored entities that purchase most mortgages sold in the U.S., offer loan programs for homebuyers who can't afford a large down payment. Programs may have income, credit, or homebuyer education requirements and may only be offered by certain lenders. Check with your lender to determine if it offers Fannie- or Freddie-backed low down-payment loans and to learn whether you qualify.
Neighborhood Assistance Corporation of America
The Neighborhood Assistance Corporation of America (NACA) is a mortgage lender that offers a No Down Payment Program to low- and middle-income homebuyers. All its mortgages are 100% loan-to-value and there are no closing costs, so you won't need cash to close if you qualify. Your interest rate won't increase without a down payment.
Down Payment Assistance Programs
Many states offer down payment assistance programs to help homebuyers purchase a home. Programs vary by state and may have credit score or income requirements. Some programs also require applicants to attend a home buying course to qualify for assistance. To locate programs in your state, start with your local housing authority or board of housing. Many offer programs or help you find organizations offering down payment assistance.
How What You Put Down Affects Your Home Offer
Unless your bid is over the asking price, the down payment probably won't sway the seller. They'll get the same amount at closing. Making a bigger down payment may give you some negotiating power in a competitive housing market, however. For instance, if you're paying more than 20% down and buying with a conventional mortgage, you have the flexibility to make your home offer more attractive with concessions like waiving appraisal and inspection contract contingencies.
Paying less money down and shopping with an FHA or VA loan means you can't skip the appraisal or the inspection (which are requirements of those loans) to make a stronger bid.
Deciding How Much To Put Down
Whether you buy now or save up a larger down payment depends on your finances and your overall goals. There are pros and cons of each, but here are some questions to consider.
- Would a lower monthly payment be more affordable? Taking advantage of a low down payment program allows you to purchase a home sooner, but taking more time to save up a bigger down payment would give you a lower mortgage payment or help you avoid private mortgage insurance. This could be helpful if you have a relatively low income or high monthly expenses.
- Will you have savings after making the minimum down payment? Cash reserves may be required depending on the loan program and the type of home you're purchasing. Even if there's no requirement, having three to six months of housing expenses set aside will give you a safety net to pay your mortgage if your income drops unexpectedly.
- Do you have a high income but low savings? Saving up a bigger down payment may not be necessary. Your income may allow you to afford a higher monthly payment.
- Do you need to purchase a bigger home? A larger down payment would allow you to purchase more house with the same monthly payment. Keep in mind, however, that there's no guarantee that home prices and interest rates will be the same next year. An increase in either could offset the benefits of a larger down payment.
Is It Better To Invest or Put More Down on the House?
If you have more than 20% saved up for your down payment, investing some of your savings may be a better option versus putting the extra toward your down payment.
Let's say you're purchasing a $300,000 home at 4% APR and you could make a 25% down payment. If you use all the money towards your down payment, your monthly payment would be $1,074, and your total mortgage interest after 30 years would be $161,706.
What if you put 20% down instead and invested the rest? Paying 20% down would mean a monthly payment of $1,145 and total interest of $172,487. If you invested the remaining $15,000 and received an average 10% return, in 30 years, your initial investment would grow to $261,741 without any additional contributions. That more than covers the additional interest you paid by choosing to invest instead of making a larger down payment.
The Bottom Line
While the traditional advice is to pay 20% down on a house to avoid paying private mortgage insurance, you can buy a house with a lower down payment. Making a lower down payment allows you to buy a house sooner than if you waited to have the full 20% down.
There's no one-size-fits-all answer. Reviewing your finances and considering your home ownership goals will help you make the best choice.
Frequently Asked Questions (FAQs)
What is the average down payment on a house?
The median down payment is 12% for all homebuyers and 6% for first-time homebuyers, according to a 2020 report by the National Association of Realtors.
How can you best save for a down payment?
Creating a budget and setting a goal are two essential steps to saving up for a down payment. Estimate the amount you'd need for different down payment scenarios—3%, 5%, 10%, and 20%—to understand what you can realistically save. Then, automate your savings to make it easier to reach your goal.
What happens if you pay back a gifted down payment?
You could be guilty of loan fraud if you repay a gifted down payment after providing documents to your lender confirming the down payment was a gift. Misrepresenting the down payment gift prevents the lender from accurately predicting your ability to repay the loan.
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