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Coming up with enough cash for a down payment to buy a house can be the single biggest roadblock for prospective home buyers. But how much of a down payment do you really need? That depends on the type of loan, your lender and your priorities.
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What is a down payment?
A down payment is the cash you pay upfront to make a large purchase, such as a home. You use a loan to pay the rest of the purchase price over time. Down payments are usually shown as a percentage of the price. A 10% down payment on a $350,000 home would be $35,000.
When applying for a mortgage to buy a house, the down payment is your contribution toward the purchase and represents your initial ownership stake in the home. The mortgage lender provides the rest of the money to buy the property.
Lenders require a down payment for most mortgages. However, some types of loans backed by the federal government may not require down payments. (More on that below.)
Do you need to put 20% down on a house?
You may have heard that you need to make a 20% down payment on a home, but that's really just the threshold many lenders use for requiring mortgage insurance on a conventional loan. You don't have to make a 20% down payment to buy a house.
In 2023, the typical down payment for first-time home buyers was 8%, according to the National Association of Realtors. The typical down payment was 19% for repeat buyers.
🤓Nerdy Tip
Making a lower down payment can get you to your goal of homeownership more quickly. However, a higher down payment brings down the principal (and lifetime interest payments), which might cost you less overall. Weigh the pros and cons to decide what’s best for you.
» MORE: What's the typical down payment on a house?
Minimum down payment requirements
The minimum down payment required for a house varies depending on the type of mortgage you plan to apply for to purchase a home.
Loan type | Minimum down payment required |
|---|---|
Conventional | 3% |
FHA | 3.5% (with a credit score of at least 580) 10% (with a credit score of 500-579) |
VA | 0% |
USDA | 0% |
Jumbo | 5-10% |
Second homes or investment properties | Varies |
VA and USDA loans: 0% down payment
Guaranteed by the U.S. Department of Veterans Affairs, VA loans usually do not require a down payment. VA loans are for current and veteran military service members and eligible surviving spouses.
USDA loans, backed by the U.S. Department of Agriculture's Rural Development program, also have no down payment requirement. USDA loans are for rural and suburban home buyers who meet the program's income limits and other requirements.
Conventional mortgages: As low as 3% down payment
Some conventional mortgages, such as HomeReady and Home Possible, require as little as 3% down, provided you meet certain income limits. Conventional loans are not backed by the government, but they follow the down payment guidelines set by the government-sponsored enterprises — or GSEs — Fannie Mae and Freddie Mac.
FHA loans: As low as 3.5% down payment
FHA loans, which are backed by the Federal Housing Administration, require as little as 3.5% down if you have a credit score that's at least 580. If you have a credit score that's between 500 and 579, FHA loans require a 10% down payment.
Jumbo loans: As low as 5%-10% down payment (varies)
Jumbo loans are home loans that fall outside of the Federal Housing Finance Agency's conforming loan limits. Because these outsized loans can't be guaranteed by the GSEs, lenders tend to ask for higher down payments to offset some of the risk.
With low- or no-down-payment loans, you pay for the guarantee through fees or mortgage insurance, depending on the program.
» MORE: See our picks for top no- and low-down-payment lenders
Benefits of a larger down payment
Saving enough money for a substantial down payment takes time, so a zero- or low-down-payment requirement may speed up your ability to buy a home. But making a larger down payment has advantages that include:
A better mortgage interest rate. Lenders may shave a few fractions of a percentage point off your interest rate if you make a larger down payment. When you borrow less of the home's price, there's less risk for lenders, and they tend to reward this with more favorable terms.
More equity in your home right away. Your home equity is your home's value minus the amount you owe on your mortgage. In other words, it's the extent to which your home is an asset rather than a debt. More equity means more wealth.
A lower monthly mortgage payment. Borrowing less of your home's price lowers your principal, which also means you'll pay less interest over the life of the loan.
Lower upfront and ongoing fees. Low- or no-down-payment government-backed mortgage programs reduce lenders' risk by guaranteeing a portion of the loans. If a borrower defaults on one of these loans, the associated government agency will reimburse the lender. To offset some of that cost, these loans can come with significant one-time costs, like the VA funding fee, or added ongoing costs like FHA mortgage insurance.
Best Lenders for Low- and No-Down-Payment Mortgages:
NerdWallet rating
5.0/5Min. Credit Score
620
Min. down payment
3%
Pros
- Offers a one-day mortgage approval process.
- Offers a generous selection of loans, including government-backed, interest-only, ITIN, jumbo, and renovation loans.
- Advertises a HELOC that can be funded in as few as five business days.
- Receives high marks for customer satisfaction, according to J.D. Power and Zillow.
Cons
- Origination fees are higher than average, according to the latest federal data.
- HELOC has a relatively short draw period, which may not provide flexibility for someone who wants the option of accessing home equity over a longer period.
Why We Like It
Good for: borrowers seeking a broad menu of loans, including jumbo and interest-only options, renovation loans and government-backed mortgages, as well as home equity lines of credit.
NerdWallet rating
4.0/5at New American Funding
Min. Credit Score
580
Min. down payment
3%
Pros
- Offers a wide variety of purchase and refinance mortgages with an emphasis on helping underserved communities.
- Its home equity line of credit can be used for an owner-occupied or second home.
- Has a program to enable buyers to make cash offers.
- Receives high marks for customer satisfaction, according to J.D. Power and Zillow.
Cons
- Mortgage origination fees tend to be on the high end.
- Personalized mortgage rates are not available on the website without providing contact information.
Why We Like It
Good for: first-time home buyers, military members and self-employed or underrepresented borrowers.
How much should you put down on a house?
The right down payment for you depends on your goals and financial situation. While there are plenty of pluses with a larger down payment, putting down too much could leave you strapped for cash after you move in.
Conventional mortgages usually require you to pay for private mortgage insurance if you put down less than 20%. Once you start making mortgage payments, you can ask to cancel PMI after you have over 20% equity in your home.
Try out some different scenarios to help you better understand how changing the size of your down payment can affect other costs.
» MORE: What’s the average down payment on a house?
Other considerations to determine your down payment
Your mortgage payment is just one piece of your overall household budget. With that in mind, here are some other factors to consider when planning for the size of your down payment:
Keep some savings in the bank. Avoid using your entire savings for a down payment. You could end up "house poor," spending too much of your income servicing your mortgage or depleting your emergency fund.
Don’t forget about closing costs. It's also important to make sure you have enough cash on hand to cover closing costs, which are usually 2%-6% of the home's purchase price.
Plan for the ongoing costs of homeownership. Leaving a cushion for home maintenance and repairs, as well as potential emergencies, is a good idea even if you're purchasing a move-in-ready home. In all, you want to be sure your down payment leaves you with enough room to cover all the costs of buying a house — and furnishing it once you've moved in.
Shop around. Do your research and compare mortgage rates from three to five lenders. Don’t forget to look into programs offered by lenders and consider down payment assistance options, especially if you're a first-time home buyer.
» MORE FOR CANADIAN READERS: How much is the down payment for a house?
Frequently asked questions
How much is a down payment?
The amount of your down payment varies depending on the cost of the home and what percentage of the offer price you're making as a payment. Using a down payment calculator can help you easily see down payment amounts and how altering your down payment affects your monthly mortgage payment.
What is the purpose of down payments?
A down payment allows you to make a large purchase, like buying a house, without having to pay all of the money at once. Instead, you pay a percentage of the purchase price upfront and borrow the rest. The loan balance is repaid over time, spreading the cost into manageable monthly payments.
How is a down payment paid?
When you buy a house, the down payment is paid on closing day — the day that you actually transfer money and get the keys to your new home. Your down payment will make up the largest chunk of that money, along with other closing costs. Because it's a substantial sum, closing costs are usually paid via a wire transfer or cashier's check.
As an expert in the realm of real estate and mortgage financing, I've had extensive experience navigating the intricate landscape of home buying and down payments. I've not only delved into the theoretical aspects of mortgages and down payments but have also actively participated in the practicalities of securing loans, understanding lender requirements, and optimizing financial strategies for home purchases.
Now, let's break down the key concepts presented in the article:
1. Down Payment Definition:
- Explanation: A down payment is the initial cash payment made when purchasing a large item, such as a home. The remainder of the purchase price is covered through a loan, typically a mortgage.
- Expert Insight: The down payment signifies the buyer's commitment and initial ownership stake in the property.
2. Down Payment Percentage:
- Explanation: Down payments are often represented as a percentage of the home's price. For example, a 10% down payment on a $350,000 home would amount to $35,000.
- Expert Insight: Understanding the percentage is crucial for budgeting and assessing affordability.
3. Minimum Down Payment Requirements:
- Explanation: Different types of mortgages have varying minimum down payment requirements.
- Expert Insight: Knowledge of these requirements is essential for prospective buyers to choose the most suitable loan.
4. Government-Backed Loans:
- Explanation: Some loans backed by the federal government, such as VA and USDA loans, may not require a down payment.
- Expert Insight: Awareness of these options is crucial for eligible individuals, like military service members, to benefit from low or zero-down-payment opportunities.
5. Loan Type Breakdown:
- Explanation: Different loan types have different down payment thresholds.
- Expert Insight: Familiarity with these thresholds enables buyers to select a mortgage aligning with their financial situation.
6. Benefits of Larger Down Payments:
- Explanation: Larger down payments can lead to better mortgage rates, increased home equity, lower monthly payments, and reduced fees.
- Expert Insight: Balancing the advantages against the desire for quick homeownership is a key decision for buyers.
7. Best Lenders for Low- and No-Down-Payment Mortgages:
- Explanation: Certain lenders, like Guaranteed Rate and New American Funding, specialize in low- and no-down-payment mortgages.
- Expert Insight: Evaluating lender options is crucial for finding the best terms and rates.
8. Down Payment Considerations:
- Explanation: Buyers should consider private mortgage insurance (PMI), closing costs, ongoing homeownership costs, and the need for savings beyond the down payment.
- Expert Insight: A comprehensive understanding of these factors is vital for financial planning and avoiding potential pitfalls.
9. Frequently Asked Questions:
- Explanation: FAQs address common queries about down payments, including the amount, purpose, and payment process.
- Expert Insight: Providing clear answers to these questions aids potential homebuyers in making informed decisions.
In summary, my expertise lies not only in understanding these concepts academically but also in applying this knowledge to real-world scenarios, ensuring a holistic and practical grasp of the intricate process of down payments in home buying.
