How Much is a Down Payment on a House?

Purchasing a home marks an exciting milestone, whether it’s your first venture into homeownership, an upgrade to a larger space, or a downsizing move. However, navigating the home buying process, particularly when you’re just beginning to explore available properties, can feel daunting and intricate. Understanding your down payment requirement and the various factors influencing its size is crucial. This knowledge will empower you to make informed financial decisions, ensuring you maximize the benefits of your purchase while avoiding potential pitfalls.

What Is a Down Payment?

The down payment represents the initial payment made at the outset of purchasing a home, and it’s a standard requirement for most mortgage arrangements. Once this down payment is made, the remaining loan balance is divided into regular monthly mortgage payments, usually spanning 15 or 30 years. Several factors come into play when calculating the appropriate down payment, including your financial standing, available loan options, and considerations regarding mortgage insurance.

How Much Should You Put Down on a House?

The down payment amount hinges on both the home’s purchase price and the specific home loan program you’re utilizing. Different mortgage loans necessitate varying percentages, with factors such as your debt-to-income ratio, credit score, and the loan-to-value ratio of the property being pivotal considerations for mortgage lenders when determining loan eligibility.

As per the National Association of Realtors® (NAR) 2023 Profile of Home Buyers and Sellers Report, the average down payment for first-time buyers stands at 8%, marking the highest figure since 1997. In contrast, repeat buyers typically put down a 19% down payment. The report also highlights that many first-time buyers increasingly relied on financial assets to secure their down payments, including investments like stocks, bonds, cryptocurrency, IRAs, and retirement programs such as 401Ks or pensions.

Do You Need to Put 20% Down on a House?

In many instances, you have the flexibility to put down as little as 3% if you opt for a conventional loan. Historically, a 20% down payment was considered standard practice for purchasing a house. However, while this figure remains common, it serves as the threshold for lenders to mandate private mortgage insurance (PMI) on conventional loans. Given that the average down payment today is considerably lower, there’s no obligation to adhere to the 20% benchmark if it doesn’t align with your financial circumstances or preferences. It’s essential to consider the pros and cons of both options to make an informed decision that suits your needs.

Pros and Cons of Putting 20% Down on a House

Pros:

• Bypass private mortgage insurance (PMI): Larger down payments can exempt you from this additional expense.
• Access better interest rates: A 20% down payment often grants you the opportunity to negotiate more favorable mortgage terms.
• Lower monthly installments: By reducing the amount you borrow, a larger down payment translates to more affordable monthly payments.
• Gain advantage in competitive markets: In competitive real estate markets where demand outweighs supply, a substantial down payment can give you an edge in bidding wars.

Cons:

• Postponed homeownership: Accumulating a 20% down payment often involves a prolonged, gradual saving journey, sometimes spanning several years.
• Potential depletion of savings: Committing a substantial portion of funds for a down payment may leave you financially exposed to unforeseen emergencies or disrupt your progress toward other financial objectives.
• Reduced funds for home-related costs: Allocating a larger down payment might limit the resources available for essential home enhancements, repairs, or significant purchases such as furniture.

Does Your Credit Score Impact Your Down Payment?

Absolutely. Your credit score plays a pivotal role in determining your eligibility for various loan programs and the interest rate offered on your loan. Additionally, it can influence the down payment amount required by lenders. Lower credit scores may restrict borrowing capacity and potentially result in higher interest rates. Prior to embarking on the home-buying journey, it’s crucial to review your credit report meticulously to understand your financial status accurately. Verify the accuracy and currency of any information provided by lenders or creditors to ensure your credit report reflects your current situation.

Loan Types and Minimum Down Payment Requirements

The down payment you’ll need varies based on the type of mortgage you intend to apply for when purchasing a home. Here are the types of loans and their respective minimum down payment requirements to assist you in selecting the appropriate home loan that aligns with your requirements and budget for the type of home you desire. As you browse listings on homes.com, each listing features a mortgage payment calculator to aid you in estimating your monthly payments.

Down Payment Requirements by Loan Type:

• Conventional loan: 3%
• FHA loan: 3.5%
• Jumbo loan: 5-10%
• VA loan: 0%
• USDA loan: 0%

Conventional Mortgages

The conventional home loan stands as the most common and widely favored mortgage option. As previously mentioned, a home purchase through a conventional mortgage can require as little as a 3% down payment, provided you maintain a credit score of at least 620. However, if your down payment is less than 20%, acquiring private mortgage insurance is necessary.

Within the realm of conventional loans, you have the option to select either a fixed-rate or an adjustable-rate mortgage (ARM). A fixed-rate mortgage entails locking in a specific interest rate for the entirety of the loan duration. Conversely, an ARM typically features a low introductory interest rate for an initial period, usually spanning three to 10 years. Following this period, the interest rate adjusts based on the index rate (the interest rate utilized by lenders for ARMs) and any additional percentage points outlined in your loan agreement.

FHA Loans

FHA Loans represent fixed-rate mortgages backed by the Federal Housing Administration. These loans cater to first-time homebuyers who might face challenges qualifying for a conventional loan due to their credit scores. Individuals with a credit score of 580 or higher can access an FHA loan with a minimal 3.5% down payment. Even if your credit score falls between 500 and 579, you can still secure an FHA mortgage with a down payment of 10%.

VA and USDA Loans

A VA loan is guaranteed by the Department of Veterans Affairs, while a USDA loan is backed by the United States Department of Agriculture. Both loan programs offer the opportunity to purchase a home with no money down. To be eligible for a USDA loan, you must meet certain income requirements and purchase a property in a designated suburban or rural area. For a VA loan, eligibility extends to U.S. military veterans, active duty service members, or their spouses, provided they meet the specified criteria.

Jumbo Loans

If you’re eyeing a high-value property and your loan surpasses the limits established by Freddie Mac and Fannie Mae, a jumbo loan could be the solution. In 2024, these limits stand at $766,550 in most parts of the U.S. Opting for a jumbo loan enables you to borrow beyond this threshold for your home purchase, with interest rates comparable to conventional loans. However, applicants usually require a credit score of 700 or above and a down payment ranging between 5% to 10%. This option is particularly advantageous for individuals with a lower debt-to-income ratio.

Benefits of a Larger Down Payment

• More equity
• Better mortgage rate
• Lower payments
• Lower upfront/ongoing fees

Additional Things to Consider with Your Down Payment

• Maintain Savings: Ensure you have a safety net in your savings to prevent financial strain, covering both emergencies and home repairs.
• Closing Costs: Be prepared for additional expenses like fees, taxes, and administrative costs, typically ranging from 2-6% of the home’s purchase price.
• Moving Expenses: Whether local or long-distance, anticipate costs averaging $1,700 for local moves and up to $10,000 for longer distances.
• Homeownership Upkeep: Account for ongoing expenses such as maintenance, repairs, property taxes, and HOA fees in your budget planning.
• Down Payment Assistance: Explore available programs tailored for first-time homebuyers to alleviate some financial burdens.
• Down Payment Calculator: Utilize a calculator to quickly determine a down payment amount that aligns with your budget.