Do your eyes start glazing over when you hear your real estate agent drone on about down payments for conventional versus FHA loans, VA versus USDA loans?
Sure, different types of loans require different down payment amounts. But for any given borrower, there are usually only a few best mortgage loan options to choose from, each with its own minimum down payment required.
You don’t need to become an expert on mortgage loans. You just need to know the basics to get a sense of how much of a down payment you need to buy a house.
How Much of a Down Payment Do You Need to When Buying a House?
Historically, homebuyers put down at least 20% to buy real estate. That protected borrowers from spending more than they could afford, and it protected banks from high default rates.
But government efforts to boost homeownership rates led to ever-lower down payments, reaching an all-time low during the housing bubble of the mid-2000s. Lending got too loose, and you know what happened after that.
And loans with low down payments remain en vogue even as underwriting has tightened. But just because the loan you’re taking out requires a lower down payment doesn’t mean that’s what you really need to buy a house. There’s often a difference between minimum down payment requirements and how much you should save for a down payment.
Minimum Down Payment Requirements
While the 0% down payment is mostly a memory at this point, there are a few special groups that can still dodge down payments entirely. Those groups are military veterans and homebuyers in designated rural areas.
Everyone else should plan to put down at least 3%, and probably much more. How much more depends on many factors, but most notably your credit score and the loan program.
This chart shows the lowest allowed down payment for mortgage type. Note that these are the lowest rates available, not necessarily the lowest rate you qualify for.
|Mortgage Type||Minimum Down Payment|
That’s a lot of alphabet soup, and you’ll learn about all those initialisms soon enough. The point is that the minimums are really low, but most buyers won’t qualify for them. You should base your personal minimum down payment on your specific circumstances.
Minimum You Should Save for a Down Payment
Spoiler alert: Most borrowers don’t qualify for VA or USDA loans, anyway. So it’s probably more than 0%. Among conventional and FHA loans, down payments still vary.
So how do you know how much you’ll need to put down on a house? Your credit score and other financial factors play a role, but it all starts with which loan type you can access.
There’s a reason they’re called conventional loans. These traditional mortgage programs are what you probably think of when you imagine going to the bank for a loan.
Conventional loans follow rigid loan programs dictated by government-sponsored mortgage giants Fannie Mae and Freddie Mac. But beware: These loans serve borrowers with strong credit best. And you generally need at least a 620 to qualify.
Strong borrowers can take advantage of programs like Fannie Mae’s HomeReady or Freddie Mac’s Home Possible to buy with as little as 3% down. But borrowers with shakier credit can expect to put down 10%, 20%, or even more on conventional loans.
The Federal Housing Administration (FHA) set out to create an alternative loan program to help first-time homebuyers with lower incomes or credit scores become homeowners. The pitch: FHA loans allow just 3.5% down for borrowers with credit scores above 580 and 10% for those with scores between 500 and 579.
That’s a winning sales pitch on the surface, but after the FHA lost so much money on defaults during the Great Recession, they tweaked the rules. Before, borrowers could remove mortgage insurance once they paid the loan down below 80% of the home’s value. But the FHA now requires borrowers to continue paying the mortgage insurance premium for the entire life of the loan.
So while your neighbor with a conventional loan calls up their lender after a few years to remove private mortgage insurance and save a hundred bucks or so a month, you’ll be stuck paying mortgage insurance 20 years in.
Still, if an FHA loan is the only way to get you into your dream home, you can always swallow the mortgage insurance pill for now and potentially refinance later or just pay off your mortgage early, which a larger down payment makes easier.
If you’re a veteran who served in the armed forces, ask loan officers about VA home loans. Beyond the 0% down payment option, these loans, backed by the U.S. Department of Veterans Affairs, typically come with generous interest rates.
Even better, VA loans don’t require private mortgage insurance, although you have to pay the VA funding fee.
These loans are an employer benefit of military service, so take advantage of them if you can. Just because they only require a 0% down payment doesn’t mean you can’t put a larger one down if it benefits you.
The U.S. Department of Agriculture tries to boost rural economies by offering generous terms on USDA loans. But it takes more than the desire for a quiet life to qualify for one. Beyond having to qualify as a borrower (the easy part), the property must sit in an approved zone. To check eligibility, view the USDA Rural Development Program Eligibility Map.
And because these loans are a form of local subsidy, they often offer better-than-market terms. That starts with their famous 0% down payment option. And like FHA loans, they won’t turn you away if your credit has some dings. But unlike FHA loans, there’s no mortgage insurance, though you have to pay a guarantee fee.
If you and your prospective property qualify, you’ll probably score a better deal on USDA loans than conventional mortgages.
Benefits of a Larger Down Payment
As a general rule, you’re better off putting down more rather than less on a home. So regardless of the minimum down payment you qualify for, padding your down payment can offer these benefits.
1. Lower Interest Rates & Fees
Mortgage lenders price loans based on risk. The higher they perceive the risk of you defaulting, the more they charge.
Putting down more money on a home lowers the bank’s risk in several ways. First, it lowers the loan-to-value ratio, so if the worst happens and you default, they have better odds of getting their money back through a short sale or foreclosure. It also means you have more skin in the game, leading to a greater financial commitment to the property.
Lenders also typically charge lower fees for lower-risk loans. That helps you save money on closing costs when you buy, not just your monthly payment.
2. Lower Payments & Life-of-Loan Interest
At the risk of stating the obvious, the less you borrow, the less interest you pay over the life of your mortgage loan.
Plus, you owe a lower monthly payment. That leaves more money for your other budget categories and prevents you from straining to make your monthly mortgage payment.
You also start with more home equity immediately. It helps some homeowners sleep better at night knowing they can always tap into their home’s equity in an emergency.
3. Avoid Private Mortgage Insurance
If you put down 20% or more to buy with a conventional mortgage, you don’t have to pay for mortgage insurance. That can save you thousands of dollars each year in money that serves the bank rather than you.
4. Easier Underwriting
A higher down payment can make you a lower-risk borrower. That can streamline your underwriting for a faster, easier closing.
5. Stronger Negotiating Position With Sellers
While cash offers carry the most weight with sellers, it helps if you can say, “You can count on me being able to settle because I’m bringing a massive down payment.” That puts you in a position to negotiate a lower purchase price or at least stand out from other offers.
If you really want to catch their attention, you can put down a huge earnest money deposit when signing the sales contract. An earnest money deposit is a type of good-faith deposit. It shows you’re serious about buying. If you back out of the agreement, the seller may be able to keep the money under certain circumstances.
Just make sure you’ll get it all back if your financing falls through or the home inspection reveals an infestation of trolls or something.
6. Avoid Jumbo Loans
A higher down payment might also help you avoid having to take out a jumbo mortgage loan.
These large loans cost more money because they exceed (don’t conform to) Fannie Mae and Freddie Mac loan amount limits on conforming loans. Expect higher interest rates, higher fees, and more red tape in underwriting.
But you can potentially avoid having to take out a jumbo loan with a larger down payment.
So, How Much Should You Put Down on a House?
If you have strong credit and plenty of cash set aside, put down 20%. You avoid private mortgage insurance, score lower fees and mortgage interest rates, and should have an easier time in underwriting.
But not everyone can swing that. Try to get as close as you can, though.
If you just barely have enough to buy right now, should you take the plunge or stand by and save more money?
It depends on your long-term goals and whether buying would save you money. In some markets, renting costs more than owning, even after taking repairs and maintenance into account. In other housing markets, like San Francisco, it actually costs far less to rent.
Buying could particularly make sense if you plan to house hack. I haven’t paid full price for housing in over a decade, and I don’t miss it.
Most important, don’t buy if it would empty your emergency fund and leave you stretched thin. Unlike renters, homeowners need to budget for home repairs and maintenance, which means they need more emergency savings. Don’t put yourself on the brink just to become a homeowner.
Homes are the largest assets most people ever own, and they’re expensive. Long before you start hunting for real estate, you should start strategizing how to foot the bill for it.
If you can find a way to put 20% down on a home, it saves you considerable money and headache in the long term. It also reduces your risks as a homeowner, both of going upside-down on your mortgage and finding yourself unable to make your mortgage payments.
If a sizable down payment proves infeasible, you can still lower your borrowing costs by boosting your credit score and taking out a conventional mortgage rather than an FHA loan.