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How Much Should You Put Down on a House?

A down payment is an initial sum of money paid in advance when purchasing a home. Potential homebuyers should be sure to put down enough of a payment so that their resulting mortgage payments are within their financial means, without depleting their savings. Making a small down payment on a house could leave you with a mortgage that is hard to manage financially. Making a big initial payment could use up all of your money, leaving you without enough money to take care of regular upkeep or to cover surprise repairs.

Getting to grips with the concept of down payments will assist you in deciding how much you should pay initially for a home.

How to Decide on Your Down Payment Amount

Selecting the appropriate initial payment necessitates a fundamental comprehension of how a down payment impacts your periodic installment and funds saved. It is important to determine an acceptable balance between your expenses and income that allows for a small amount of flexibility if sudden costs arise without depleting all of your savings. Homebuyers should consider the following when mulling over their choices:

Higher down payment considerations.

Your monthly payment will be lower. Besides the obvious benefit of a lower loan amount, a higher down payment may reduce other monthly costs like private mortgage insurance (PMI). Lenders waive PMI with at least a 20% down payment because they consider it less likely you’ll default on your mortgage.
You’ll deplete more of your cash reserves. If you’re cleaning out your savings for your down payment, you need to consider how you’ll cover unexpected rainy-day homeownership expenses, like roof leaks or a water heater replacement.
You’ll be able to afford a more expensive house. Lenders calculate your debt-to-income (DTI) ratio to ensure your house payment doesn’t use up too much of your monthly paycheck. A lower mortgage payment gives you a lower DTI ratio, which allows you to qualify for a higher-priced home.

Lower down payment considerations.

Your monthly payment will be higher. This is especially true for PMI costs; lenders base your PMI costs on your loan-to-value (LTV) ratio, which measures how much of your home’s value is borrowed. The higher the LTV ratio, the higher your monthly PMI payment will be.
You’ll leave more money in the bank. Extra cash in the bank makes it less likely you’ll turn to credit cards to cover home repairs, and gives you a cushion if you have an unexpected job loss or other emergency.
You’ll have more cash to invest. You can contribute extra cash to your 401(k) or other retirement savings with a better return.

Demonstrating the mathematics of a mortgage down payment is simpler. This table illustrates the discrepancies between your monthly payment and the amount of cash needed for the down payment when acquiring a $350,000 home with a 30-year conventional mortgage at an interest rate of 5.5%.

Reviewing your down payment options.

Using the numbers above, here are some things to consider:

The lowest down payment leaves you with $59,500 more cash in the bank compared to the highest down payment.
The lowest down payment costs you an extra $514.65 per month compared to the highest down payment.
It will take you almost 10 years to break even on the extra money you spend for a higher down payment based on your monthly payment savings.
You’ll spend an extra $6,175.80 every year on monthly mortgage payments for a low down payment versus the higher down payment option.
You’ll have $70,000 of equity in your home with the highest down payment, making it easier to sell quickly.
You’ll have less home equity with the lower down payment, which could mean you end up spending money to sell your home.

Should I Make a 20% Down Payment on a House?

It is commonly believed, though not true, that purchasing a home requires a 20% down payment.

The table above demonstrates that the idea of needing a 20% down payment for a conventional loan is a misconception, yet there are still some meaningful advantages to doing so.

You should make a 20% down payment if:

You have enough extra cash on hand to maintain your lifestyle and cover ongoing homeownership and maintenance expenses.
You want to avoid the expense of PMI.
You want the lowest possible mortgage rates.

What Are The Pros And Cons Of Putting 20% Down?

Let’s review the advantages and disadvantages to determine how putting a lot of money down can balance out other costs and payments.

Pros:

It is usually thought that making a 20% payment when taking out a loan is the ideal amount for most loan and lender types. If you can manage to pay a 20% deposit on your house, you will get some important advantages.

No PMI

If you desire to bypass the purchase of private mortgage insurance (PMI), you will have to put down 20%. PMI is a type of insurance that provides a safeguard for the lender if you fail to make payments on your mortgage.

Even if you don’t pay the full 20% upfront on the home, you can ask the lender to eliminate Private Mortgage Insurance when you have gained 20% equity in the property.

Equity is the proportion of a home’s worth which is owned by the homeowner. Here are two ways you can gain equity:

If your home increases in value.
If you pay off your mortgage principal through your monthly mortgage payments.

In most circumstances, lenders will discontinue Private Mortgage Insurance coverage when you have gained at least 22% ownership in your house.

Better Interest Rates

The monthly rate that your lender charges you for the amount of money you have borrowed (the principal or outstanding balance on your mortgage) is called the interest rate, and is expressed as a percentage.

The more money you put down initially, the less likely lenders are to consider you a threat. If you can make a down payment of 20% or more on your mortgage, you may be eligible for lower interest rates. A decrease in interest rate of only one or two percent can result in big savings for you during the period of your loan.

Lower Monthly Payments

If you put down a larger initial payment, you will need to borrow less money for your mortgage loan. The fewer loans you take out, the lower your mortgage payments will be on a monthly basis. This makes it simpler to plan for maintenance costs or any other outlays you have every month.

Competitive Edge Over Other Buyers

Home sellers typically favor buyers who have a minimum of 20% to put down. Having a larger initial payment implies that your finances are more stable, making it easier to find a mortgage lender. This can give you an advantage compared to other purchasers, especially if the house you are interested in is a highly sought-after property.

Cons:

Putting 20% down isn’t right for every buyer. Some buyers simply can’t afford it. Some people prefer to have some money saved up for potential repairs and other costs. When you are pondering how much of a down payment you should make when buying a house, think about the disadvantages.

More Financial Risk

Once you invest in a mortgage, it can be difficult to recover the funds. If you are concerned that you might have to use the money for something essential in the future, it could be prudent to save less and build an emergency fund.

Less Money For Repairs And Other Items

Houses in need of just a small amount of repairs can be a great deal for those purchasing them. Even if you have a lot of money for the initial down payment, you will still have a smaller amount left for repairs and maintenance.

Longer Time To Save

For most individuals, putting aside money for a down payment can take a long time – ranging from weeks to years and even decades. Putting off saving up a 20% down payment can be very expensive in the long run since it will cost you the amount you would be paying in rent each month. It could be less expensive overall to purchase a house now rather than pay rent while putting aside money for a 20% down payment.

Should I Make a Low Down Payment on a Home?

The median home price is around $403,000, and with the increasing mortgage rates, many potential buyers are having difficulty coming up with a significant down payment. Fortunately, there are low down payment options, including:

Fannie Mae HomeReady® loans. The HomeReady loan program requires a minimum 3% down payment. Income limits apply, and you’ll need at least a 620 credit score to qualify.
Freddie Mac Home Possible® loans. The Home Possible loan program also requires a minimum 3% down payment but requires a higher minimum credit score of 660.
FHA loans. You can pay as little as 3.5% down with a loan backed by the Federal Housing Administration (FHA) — if you have at least a 580 credit score. The down payment minimum jumps to 10% if your credit score is between 500 and 579.
VA loans. Military service members, veterans and eligible surviving spouses can get a loan guaranteed by the U.S. Department of Veterans Affairs (VA) with 0% down. While there’s no required minimum credit score, many lenders have a 620 score cutoff.
USDA loans. The U.S. Department of Agriculture (USDA) offers 0% down payment home loans to eligible low- and moderate-income homebuyers in designated rural areas. There’s no USDA minimum credit score, but most lenders expect to see at least a 640 score.
Down payment assistance. You may find that your state or county offers down payment assistance (DPA) programs to help cover your down payment and closing costs. Check with your local housing finance agency for more information.

Down Payment On Your Secondary Residence

A second dwelling is a place that you plan to live in in addition to your main home. This could be a residence that is used for vacations or one that you frequent often.

In order to obtain a regular loan, stricter requirements must be met by those looking to purchase a second residence. In order to be eligible for financing a second house, you must put down a minimum of 10% as a down payment. Bear in mind that there may be limits on what is classified as a second residence. You can only lease the property for a maximum of 180 days annually.

FHA loan: You cannot use an FHA loan to buy a second property.
VA loan: You cannot use a VA loan to buy a second property.
USDA loan: You cannot use a USDA loan to buy a second property.

Can You Buy A House Without A Down Payment?

Yes! You can purchase a house without putting any money down. You won’t be able to obtain a conventional loan with no money down. You’ll need to get a government-backed loan.

Government-backed loans are mortgage loans that the government insures. Lenders are less likely to incur losses if you are unable to pay back the loan since the government will take care of the debt. This implies that creditors will be more open to providing interest rates that are lower than the standard rate, and they will also require smaller down payments.

It is possible to purchase a house without having to pay an initial downpayment if you qualify for a VA loan or a USDA loan. VA mortgages are available to current and former members of the Armed Forces as well as certain surviving spouses. Mortgages offered by the U.S. Department of Agriculture are available for properties in eligible rural and suburban areas.

No down payment is required for either VA or USDA loans, but you must meet the criteria established by the VA and the USDA. Rocket Mortgage® does not offer USDA loans.

So, How Much Should You Put Down On A House?

There’s no one-size-fits-all answer. It would be wise to assess the financial implications of a down payment on the amount of money you will have to pay every month. To understand the impact of a specific down payment on your monthly mortgage payment, you can use our mortgage calculator. You will be asked to provide some basic information to calculate an approximate monthly payment, and you can try out various down payments to determine which one is most suitable for you.

The Bottom Line

It is no longer necessary to put down a 20% deposit when purchasing a house. It is conceivable to purchase a house with a meager portion of 3% down, and you may even be able to get a place without having to put any money down if you are eligible for a VA or a USDA loan.

If you have not put down at least 20% on a house, you will likely be required to buy private mortgage insurance, pay a higher interest rate, or face more competition in the housing market.

Frequently Asked Questions

What happens if I make less than a 20% down payment?

If you get a traditional loan and put down less than 20%, you will have to pay for private mortgage insurance. This expense will be incorporated into your regular home loan payment, and it can be taken away once you attain an 80% loan-to-value ratio.

No matter what size down payment you make, FHA mortgages necessitate an initial and yearly FHA mortgage insurance charge. You can pay off your mortgage in 11 years if you put 10% or more down when you close on it, or by refinancing into a loan that has an 80% loan to value ratio.

How does your down payment affect a purchase offer?

In a housing market where there is a lot of competition, making a 20% or higher down payment can demonstrate to a seller that you are financially secure, and can give you an edge in making the winning offer when purchasing a home.

How can I save more for a down payment?

Try one or more of these tips to save extra cash toward your down payment before you buy a home:

Stash cash from gifts and bonuses and set them aside in a down payment fund you don’t touch.
Borrow money from a 401(k).
Start a side hustle and set the money aside for your down payment.