Read This Before You Make a Down Payment on a House

Photo illustration to accompany article on down payments Clint Branch and Shutterstock

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It might be the biggest check you ever write in your life — and the amount you choose to pay can affect your monthly budget for decades.  

So calculating a down payment is not a decision to take lightly. How much you put down on a new home can have implications that last for the entirety of your journey as a homeowner.

A down payment is required on nearly all mortgages, and while standard best practices recommend putting 20% of your home’s sale price down, some mortgage lenders allow much lower payments.

Gathering enough cash to make a down payment is one of the biggest obstacles to buying a home, and if you’ve been saving toward your down payment for several years, finally writing that check may be daunting. 

“For many buyers now, especially young buyers who might be buying a home for the first time, the home ownership goal is competing with their other financial goals,” says Liz Sylvan, CFP, financial planner at Cultivating Wealth in New York. “A lot of people have student loans, need to be saving for retirement and, at the same time, want to save for a down payment.”

To help ease the process, it’s important to know exactly what you’re getting into beforehand. 

Here’s everything you need to know about your down payment so you can secure your new home with confidence.

What Is a Down Payment and Why Is It Necessary?

Your down payment is the sum of cash you commit up front toward your loan and represents your initial stake in a new home.

“Most mortgage lenders require you to start off with a down payment,” Sylvan says. “Starting out with equity in your home makes it so that when you go to sell, you have something to show for it. You’re giving yourself a head start.”

Your down payment also represents proof of your commitment, providing some security in the eyes of the lender. A solid down payment may signify you’re less likely to default on payments and that you have the financial means and discipline to save a large amount.

Down Payment Requirements by Loan Type

Down payment requirements vary depending on the type of mortgage loan you qualify for, but very few lenders are willing to accept no down payment at all. 

“Loans are typically broken into two high-level categories: government and conventional,” says Arielle Minicozzi, CFP, of Modern Money Advisor, a virtual financial planning firm. “Within each of those categories, there are several loan programs.” 

Typically, for a conventional mortgage through a private lender, you should be prepared to put down 20% of the purchase price of your home, but factors such as your credit score and property type may influence the down payment your lender expects. 

If you qualify for government-backed loans, your required down payment may be closer to 3% or even as low as zero. First-time home buyers may also have more flexibility when it comes to down payments, depending on qualification for assistance programs.

According to the Profile of Home Buyers and Sellers from the National Association of Realtors, the median down payment was 12% for all buyers in 2019. For first-time buyers, the median was 6% and repeat buyers paid a median 16%.

Conventional loans

If you choose a conventional loan from a private lender, you should typically expect to pay 20% down. However, even conventional loans sometimes allow less in up-front payment.

However, if your down payment is less than 20%, your lender can require you to pay for PMI, or private mortgage insurance.

PMI can help you purchase a home more quickly if saving for a down payment is a big obstacle for you, but it’ll also add to your monthly payment. Typically, once you’ve met the 20% threshold in payments toward your loan principal, you can stop paying PMI.

Government loans

In some cases, you may qualify for government-backed loans, including Federal Housing Administration (FHA), Veterans Affairs (VA), or United States Department of Agriculture (USDA) loans. 

“FHA loans are only allowed for primary residences, USDA loans are only allowed for properties in rural areas, and VA loans are only allowed for veterans of the U.S. military and their spouses,” Minicozzi says.  

VA and USDA loans don’t require you to put any payment down, while FHA loans offer down payment minimums of 3.5%. In exchange for these smaller down payments, FHA and USDA loans charge mortgage insurance, while VA loans forgo insurance but do come with a “funding fee.”

The Benefits of a Large Down Payment

A larger down payment means the actual loan required from the lender will be smaller — and therefore monthly payments will be smaller too. Plus, a more substantial down payment up front can help you qualify for a lower interest rate, because you will present less risk to the lender.

You may also pay fewer fees (both up-front and ongoing) and, if you meet the 20% threshold, forgo the monthly cost of private mortgage insurance. According to data from the Urban Institute, that PMI cost can range from 0.55% to 2.25% of your total loan amount per year.

A larger down payment doesn’t just minimize the lender’s risk, Sylvan says, but yours, too. 

By putting down a lower amount and taking on a loan that you may not be financially fit for, she says, “You’re putting yourself in a more risky position if you lose your job, you can’t meet your mortgage payments, and your home value declines, which is a reality for a lot of people.”

Even when you’re not required to put down 20%, it’s still the amount most recommended by experts because the benefits are so great. A lower interest rate, lower monthly payments, and more up-front equity in your home can start you off on the right path as you begin your home-owning journey.

When to choose a smaller down payment

A large down payment can be the healthiest choice in terms of your loan payoff, but when many Americans are already balancing several financial obligations at once, it may not be feasible. 

If a 20% down payment is going to deplete your emergency savings or derail your other financial goals, it may be best to choose a lower down payment option or wait to purchase your home until you’ve built a bigger cushion.

“There are so many competing financial interests that we have; whether it’s student loans, getting on track for retirement, saving for child care costs or a child’s education, it’s a pretty long list,” says Kevin Mahoney, CFP, founder of Illumint, a financial planning firm based in Washington, D.C. “Even if the math might suggest a 20% down payment is optimal, maybe it’s not the best or even an accessible option for you at this time.”

Still, make sure you calculate the added costs a lower down payment may accrue over time. Your monthly costs will likely be higher, because you’ll take on a larger loan (likely at a higher interest rate) and, in most cases, incur the cost of mortgage insurance. Paying more up front may cost you much less in the long run.

Make sure your budget accounts for those higher monthly costs in addition to your other financial goals and obligations — as well as how those costs may change the value you can recoup if you decide to move in a few years. If the numbers don’t align, take time to reconsider whether purchasing is really the right choice for you right now. 

And remember, the down payment isn’t the only thing you’ll need to pay up front. Consider closing costs such as fees, insurance, and taxes, as well as other loan origination costs.

“Even things like moving and furnishing a new place, any initial repairs, or renovations,” Mahoney says. “That should be factored into the initial financial math as much as the down payment and the closing costs.”

Down Payments During a Pandemic

As a result of the pandemic, some potential buyers may have seen prices and interest rates decrease — but lenders have become much more strict about who they grant mortgage loans to as well. 

“Future employment for many workers is unclear or uncertain at the moment, and some lenders are wary about making loans to borrowers that may require entry into forbearance or even modification programs in the not-too-distant future,” says Keith Gumbinger, vice president at HSH.com, a consumer resource site for mortgages.

Not only is your credit score and proof of income more important than ever, but proving your ability to put down a large sum like 20% of your purchase price can also increase your likelihood of being granted a loan with favorable terms in an uncertain climate.

“People who are still employed and have already been saving for a while could be in a great position to buy right now, because in certain areas home prices probably are going to decrease and interest rates are low, which makes it attractive to take on a mortgage,” Sylvan says. 

And if you have faced economic hardship over the past few months or you’re not quite ready to hand over such a large amount of cash, there’s no harm in waiting. Even if interest is a driving factor in your decision, experts predict that low interest rates are here to stay.

“I’m still inclined to encourage people not to rush into this, because we’re living in such a unique moment,” Mahoney says. “People’s housing interests may look different on the other side of this.” 

Saving for Your Down Payment

If you already own a home and you’re selling it to purchase something new, the easiest and most common solution is to use the proceeds from that sale to fund your down payment. You can increase your down payment by adding more savings, but a big benefit of building equity in your current home is to use that to help finance your next home.

Down payments for first-time home buyers are often funded by long-term savings, cash windfalls such as an inheritance, or even gifts from friends and family members.

You’ll likely be saving for several years toward your first down payment, especially if you’re trying to meet other financial goals and obligations simultaneously.

“When you’re saving for your down payment, save an emergency fund first with three to six months of expenses, because that gets you in the habit of saving,” Sylvan says. “When you’re a homeowner, you really need to have that money backed up.”

Then, leave your emergency savings in place and begin redirecting those monthly savings into your down payment fund.

One smart way to save for your down payment is to “play house” — practice paying your monthly mortgage payments now. Use a mortgage calculator to estimate your future monthly payments. Then after you pay your rent or current home costs each month, begin directing the difference into your savings account.

Not only will you quickly build up your down payment fund this way, but you’ll also feel less of an impact once you complete the home-buying process, because you were already putting away that larger payment each month anyway. 

You can also use this as a litmus test to ensure you can afford your expected costs on your current budget.

Bottom Line

Buying a new home, whether you’re a repeat buyer or first-time homeowner, can be an intimidating process. Do your research beforehand and start saving as much as possible so you’re in your best financial shape when the time comes to pay your down payment and secure your loan.

Learn more about the next steps to consider in your home-buying process with our home buying guide.