If you’re considering buying a house, you might be wondering how much money you’ll need for a down payment. Here are the must-knows about down payments to help you decide what makes sense for your situation.
Do You Need A 20% Down Payment On A House?
The idea of a 20% down payment can make homeownership feel unrealistic, but the good news is that very few lenders still require 20% at closing. That said, it may still make sense to pay the full 20% of the home’s purchase price if possible.
Before you decide, you should weigh the pros and cons of making a large down payment, to see what is not only feasible for you, but what will work best with your finances and goals.
What Are The Pros And Cons Of Putting 20% Down?
Let’s look at the pros and cons to see how a large down payment can offset other payments and expenses.
A 20% down payment is widely considered the ideal down payment amount for most loan types and lenders. If you’re able to put 20% down on your home, you’ll reap a few key benefits.
You’ll need to put 20% down if you want to avoid buying private mortgage insurance (PMI). PMI is insurance that protects your lender if you default on your mortgage loan.
Even if you don’t put 20% down, you can request that your lender remove PMI once you’ve reached 20% equity in your home.
Equity refers to the amount of a home’s value that you own. 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 cases, lenders automatically cancel PMI once you’ve built at least 22% equity in your home.
Better Interest Rates
The interest rate is the percentage of the principal, or outstanding balance on your mortgage, that your lender charges you monthly for borrowing money.
The higher your down payment, the less of a risk you are to lenders. If you’re able to put down at least 20% on your mortgage at closing, you may have access to lower interest rates. An interest rate that’s just one or two points lower can save you thousands of dollars over the course of your loan.
Lower Monthly Payments
The larger your down payment, the less money you’ll borrow for your mortgage loan. The less you borrow, the smaller your monthly mortgage payments will be. This makes it easier to budget for repairs or any other expenses you incur each month.
Competitive Edge Over Other Buyers
Home sellers often prefer to work with buyers who have at least a 20% down payment. Higher down payments indicate that your finances are more likely to be in order, so you might have fewer problems finding a mortgage lender. This can give you an edge over other buyers, especially if the home you want is in a hot market.
Cons Of Putting 20% Down
Putting 20% down isn’t right for every buyer. Some buyers simply can’t afford it. Others would rather keep some cash reserved for future repairs and other expenses. If you’re trying to decide how much down payment you need to buy a house, consider these drawbacks.
More Financial Risk
Once you put money down on your mortgage, it’s not easy to get it back. If you think there’s a chance you might need the money for something important later, it may be wise to put down less and build your emergency fund.
Less Money For Repairs And Other Items
Homes in need of only a few minor repairs can be a bargain for new buyers. However, the larger your down payment, the less money you’ll have left over to spend on repairs and maintenance.
Longer Time To Save
For most people, saving for a down payment can take months, years or even decades. Waiting until you have a 20% down payment can lead to a huge opportunity cost when you factor in what you’d spend each month on rent. It may be more affordable in the long run to buy a home now than it is to pay rent while you save up for a 20% down payment.
Can You Buy A House Without A Down Payment?
Yes! It’s possible to buy a home with no money down. However, you won’t be able to get a zero-down conventional loan. You’ll need to get a government-backed loan.
Government-backed loans are mortgage loans that the government insures. They present less of a risk to lenders because the government will cover the financial loss if you default on the loan. This means that lenders will be more willing to issue lower-than-average interest rates and offer less-strict down payment requirements.
Currently, you can buy a home with no money down if you qualify for a VA loan or a USDA loan. VA loans are mortgage loans for current and former members of the Armed Forces and certain surviving spouses. USDA loans are mortgage loans for homes in qualifying rural and suburban areas.
Both VA loans and USDA loans have a zero-down payment guarantee, but you must meet the minimum qualifications set by the USDA and the Department of Veteran Affairs (VA).
What Are The Minimum Down Payment Requirements?
The amount you’ll need for a down payment depends on the type of loan you choose. Some of the minimum down payment requirements also depend on whether you’re buying a primary residence, secondary residence or investment property.
Down Payment On Your Primary Residence
Down payment requirements for your primary residence, or main home, can vary. It depends on the type of loan you’re applying for and your personal financial situation.
Conventional loan: Conventional loan requirements for primary residences are totally up to the individual lender. Some lenders might require you to have 5% down, while other lenders may only require 3%. If you have a credit score that’s above 620 points, your lender may give you access to lower down payment loan options.
FHA loan: With an FHA loan, you’ll need a down payment of at least 3.5%. To be able to put down the minimum 3.5% FHA down payment, you’ll need a credit score of 580 or higher. If your credit score is between 500 and 579, you’ll be required to put down at least 10%. The minimum credit score required by many mortgage comapnies is 580.
VA loan: You don’t need a down payment to qualify for a VA loan. There are specific length-of-service requirements that determine your eligibility, and your discharge reason also plays a role. You can view complete service requirements for the VA loan program on the Department of Veterans Affairs (VA) website.
If you’re the spouse of a military member or veteran who died in service or from a service-related disability, you may also be eligible for a VA loan. Full eligibility requirements for spouses are also available on the VA website.
USDA loan: Like a VA loan, you don’t need to have a down payment to get a USDA loan. But to qualify, your home needs to be in an approved rural or suburban area and your household members also need to meet certain income requirements.
Down Payment On Your Secondary Residence
A second home is a residence that you intend to occupy in addition to your primary residence. This can be a vacation home or a property that you visit on a regular basis.
Conventional loan: Conventional loan requirements are higher for people who want to buy a second home. To qualify for a loan on a second home, you’ll need a down payment of at least 10%. Keep in mind that restrictions on what is and isn’t considered a second home may apply. For example, you can only rent the home for up to 180 days a year.
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.
Down Payment On Your Investment Property
Investment property is real estate that you buy in order to earn a return on your investment, either through rental income, the future resale of the property or both.
Conventional loan: If you buy a home with the sole intention of renting it out, you’ll need a conventional loan. Conventional loan requirements for investment properties are the strictest of any loan type. In most cases, you’ll need a down payment of 20 – 25% to qualify. If you have a credit score that’s higher than 720, you may qualify for an investment property loan with 15% down.
FHA loan: You cannot use an FHA loan to buy an investment property.
VA loan: You cannot use a VA loan to buy an investment property unless you’re financing the purchase of a multifamily home and will use one of the units as your permanent residence.
USDA loan: You cannot use a USDA loan to buy an investment property.
So, How Much Should You Put Down On A House?
There’s no one-size-fits-all answer. But a good place to start is by taking a realistic look at how your down payment will affect how much you’ll pay each month. To get an idea for how a certain down payment will affect your monthly mortgage payment, look at our mortgage calculator. You'll enter some basic info to get an estimated monthly payment, and you can play around with different down payment amounts to see what works best for you.
The Bottom Line
You no longer need a 20% down payment to buy a home. It’s possible to buy a home with as little as 3% down, and you may even be able to buy a home with no money down if you qualify for a VA or a USDA loan.
If you have less than a 20% down payment, you may have to buy private mortgage insurance, pay a higher interest rate or face more housing market competition.
Still not sure what type of mortgage is best for your needs and your down payment savings? Get started with a lender to learn more about getting approval, and to figure out which loan option best fits your financial situation.