You have your credit score, proof of income, and account summaries for your assets and debts. There’s just one more thing you need before you can secure preapproval for a mortgage: your down payment. But how do you decide what to put down?
The process of determining your down payment can be overwhelming, so before you start a conversation with your lender, ensure you understand what a down payment is, and how a smaller or bigger one can affect your bottom line.
A down payment is the portion of a home’s purchase price that buyers pay up front. They are most often expressed as a percentage of the purchase price and can range from 0% to 100%. Requirements for the size of down payment are usually determined by the type of mortgage the homebuyer is using to finance their home purchase.
The more money you put down, the less you have to borrow from the lender (this amount is known as the principal) and the less you will end up spending on accrued interest. Lenders like when people make big down payments because it lowers their risk of default.
The standard advice is that buyers should aim for a down payment of 20% or more. This sizable upfront investment helps build early equity in a home, and prevents homebuyers from having to purchase private mortgage insurance (PMI).
Lenders require borrowers who put down less than 20% to purchase PMI to protect the lender in the event the borrower defaults. The policy doesn’t offer the borrower any protection or benefits — it just adds to their costs. Once the borrower has a loan-to-value ratio of 80%, the policy will either be automatically or buyers can apply to have it canceled.
Let’s say you bought a $425,000 house with a 20% down payment of $85,000. Your mortgage would be $340,000, and assuming you got a 30-year fixed rate mortgage with an interest rate of 6.55%, you would end up paying $437,850 in interest over the lifetime of the loan.
Now, let’s say you bought that same $425,000 house with a 10% down payment of $42,500. Your mortgage would be $382,500, and assuming you had a 30-year fixed rate mortgage with an interest rate of 6.55%, you’d end up paying $492,581 in interest by payoff. That’s a difference of $54,731.
But since you had a down payment lower than 20%, your lender also requires you to purchase PMI. Let’s assume you have excellent credit and are given a 0.58% PMI rate. That would add $185 onto your monthly mortgage bill, and cost you an additional $17,500 over the lifetime of your loan.
A 20% down payment isn't necessarily required. In fact, most people put less money down. The minimum down payment that's possible depends on the type of home loan you're taking out. Here’s a breakdown of the absolute minimum down payment by loan type:
You need a down payment of at least 3% to get a loan that conforms to the guidelines set by the Federal Housing Finance Agency for mortgages that can be bought by Fannie Mae and Freddie Mac. A down payment that low is only an option for a fixed-rate home loan with a term that's no longer than 30 years. On other conforming loans, you'll be required to put at least 5% down.
The requirements for these loans are up to the lenders, so a lender could in theory offer you a loan with a down payment as low as 0%. However, it's far more likely that lenders will ask you to put some money down. In particular, if you're shopping for a jumbo loan, you'll probably need a down payment of at least 20% to get approved.
If your credit score is 500 to 579, you'll need to make a down payment of at least 10%. If your credit score is 580 or higher, your down payment could be just 3.5%.
For mortgages offered by private lenders and guaranteed by the USDA, no down payment is needed. You generally don't have to put money down for a direct loan from the USDA either, but if you have money saved up you might be asked to use some of it for a down payment.
You can put 0% down on a VA-backed purchase loan as long as you aren't buying the home for more than its appraised value. And you generally don't need to make a down payment if you get a Native American Direct Loan from the VA.
There's no upper limit to a down payment, other than the price you're paying for your new home. If you have the means, you can pay up to 100% upfront. (If you pay exactly 100%, you're not taking out a mortgage but paying the entire cost of the home yourself — that means you’re buying in cash.)
Be aware that lenders have to check where your down payment is coming from. If you're offering to make a very large down payment, don't be surprised if your lender asks a lot of questions about how you got that money and requires additional documentation proving that it's yours to spend.
The standard advice is that you should make a down payment of 20% or more. This isn't a hard-and-fast rule, and most people put less money down, but regulators and lenders view loans with down payments of at least 20% as safer bets. You'll likely be offered a better interest rate if you can make a down payment of this size, and lenders might be willing to offer you a larger loan than you'd otherwise qualify for.
Large down payments of 20% or more certainly have benefits, but not without some drawbacks. The same is true of small-to-no down payments. Use a mortgage calculator to get a better sense of how much house you can afford and how your down payment will impact that. You can adjust the down payment amount to see what a monthly payment would look like.
Additionally, review the advantages and disadvantages of large vs. small down payments below:
No matter the size of your down payment, it should never come at the cost of the following:
If you don't have enough savings to make a down payment, you might benefit from a down payment assistance program. These programs are offered by state and local governments, or sometimes by nonprofits, and they're usually aimed at first-time homebuyers with low income.
Assistance may come in the form of a grant, a low-interest loan, or a loan that's forgiven after a certain period of time. A Department of Housing and Urban Development-approved counselor can give you information about available programs and help you figure out if you might qualify for them.
You can also get someone else to help you make a down payment. This is called using a mortgage gift, and you'll need to get a gift letter.
There's no single down payment recommendation that will work for everyone. Whatever your circumstances, it's a good idea to think about how much you can realistically save before deciding on a down payment amount. And if you find yourself struggling to reach your goal, be sure to look into types of home loans that don't require money down or that allow for low down payments.
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