A down payment is the portion of a home’s sale price you pay out of pocket. Mortgage lenders require a minimum down payment amount for most loan types. The amount you put down determines how much of the sale price you’ll finance and if you’ll have to pay mortgage insurance.
What is a mortgage down payment?
The definition of a down payment on a home purchase is the percentage of the purchase price you’ll pay upfront. It’s a vital part of obtaining a mortgage loan. Without it, you’ll be ineligible for most types of financing.
How does a down payment work?
A down payment typically consists of two parts and is closely tied to your mortgage. First is the earnest money deposit you submit with your offer, which will be held in escrow until closing. The rest of the down payment is paid at closing.
Your loan amount will be the purchase price minus your down payment. If you put 20% down, for example, you’ll need to finance 80%, which is an 80% loan-to-value ratio.
The earnest money deposit will be credited toward the purchase at closing. You’ll pay the remainder of the down payment at closing, via a wire transfer or cashier’s check.
How much should a down payment be?
In deciding how much to put down, the most important factor is your loan requirement.
Loans backed by the Department of Veterans Affairs (VA) and the U.S. Department of Agriculture (USDA) provide up to 100% financing, so only a low down payment or no down payment will be required. For any other loan type, you’ll need a larger down payment.
Lenders require at least 5% down for standard conventional mortgage loans. However, special programs let qualified low-income buyers purchase with as little as 3% down.
Loans backed by the Federal Housing Administration require at least 3.5% down with a credit score of 580 or higher, or 10% down with a score lower than 580.
Once you know the minimum you must put down, you can think about how much you should put down.
A down payment of 20% is considered optimal for several reasons:
- It reduces your debt-to-income ratio, which makes it easier to qualify for a loan.
- Investing your own money in the home reduces the lender’s risk and could result in a lower interest rate.
- You avoid having to pay mortgage insurance premiums, which cost roughly 0.22% to 2.25% of your original loan amount per year, according to Chase.
- You start with considerable equity, which protects your investment if property values fall.
That said, the average down payment on a house was just 13% of the purchase price in the first quarter of 2023, according to Realtor.com data. Many borrowers simply don’t have 20% to put down, and some who do have the money also have good reasons to put down less.
If a large house down payment wipes out your cash reserves, you’ll risk losing your home if a financial emergency leaves you unable to make your payments.
A lower down payment also leaves you with more cash you can use for major home repairs or to invest in your or your kids’ education or even your retirement. Compounded returns on long-term investments can offset the added expense of a lower down payment.
Down payment examples
Observing how different scenarios affect your mortgage can help you decide how much to put down.
Say, for example, you’re taking out a 30-year fixed-rate mortgage on a $300,000 home. You have the down payment money but aren’t sure you want all of it tied up in the home.
Here are your choices:
- Put down 20%, or $60,000, and finance $240,000
- Put down 10%, or $30,000, and finance $270,000
- Put down 5%, or $15,000, and finance $285,000
Here’s how each of these scenarios looks after five years, assuming a 7% interest rate and 0.89% private mortgage insurance (PMI):
The 5% down payment keeps $45,000 in your pocket initially, compared to a 20% down payment. But notice how the savings whittles down to $14,400 ($155,820 - $141,420) after five years when you factor in the higher mortgage payments and PMI premiums.
Factoring the difference in equity after five years, the 5% down payment actually costs you $42,359 ($74,084 - $31,725) compared to if you’d made a 20% down payment. Moreover, the 5% down payment more than doubles the cost of building equity.
Of course, you could regret that big down payment if, a year or two after you move in, you accumulate thousands of dollars in credit card debt for a major repair or renovation you couldn’t pay for out of pocket because you’d used all your cash for the down payment. Over time, that high-interest debt could cost you as much as you’d have spent on PMI.
As the Realtor.com data shows, most buyers find a happy medium between the minimum down payment and putting down 20%.
How to save up for a down payment
Saving for a down payment is easier if you budget for the amount you need. Freddie Mac suggests multiplying your gross income by 2.5 to find out how much house you can afford. You’ll have to adjust that up or down according to the prices of homes in your area.
Next, calculate 5% of the purchase price for your minimum down payment and 2% to 5% of the loan amount for closing costs. That’s how much you need to save.
How long it’ll take to save up your down payment is wholly dependent on how much you need to save and how much you can devote to saving each month. If, for example, you need $25,000 and can save $500 per month toward your goal, you should have enough saved in 50 months, or just over four years.
Here are some tips to help you save for a down payment:
- Reduce or eliminate unnecessary expenses.
- Set up automatic transfers from your checking account to a savings account earmarked for your down payment.
- Devote “windfall” money such as gifts, work bonuses, and tax refunds to your down payment savings.
- Work overtime or get a side gig and save your extra earnings.
- Research down payment assistance programs you might qualify for. The U.S. Department of Housing and Urban Development maintains a list of resources for prospective homebuyers.
Mortgage down payment FAQs
How much is a down payment on a house?
A typical down payment on a house is anywhere from 5% to 20%.
Do you really need a down payment?
Yes, unless you take out a VA or USDA mortgage loan. Are down payments good or bad?
Down payments are recommended because they give you instant equity and make borrowing easier. However, it can be challenging to save for one.
How do I get a down payment?
Homebuyers typically save money for a down payment, and some mortgage loans allow you to use gift money. Also, state and local programs sometimes provide down payment assistance.
Is it hard to get a loan for a down payment?
Yes, it usually isn’t feasible to borrow money for a down payment. Besides, borrowed funds are likely to disqualify you from a mortgage loan.
Why is it important to have a down payment?
A down payment makes borrowing less expensive and reduces your risk of defaulting on the loan. Without one, you’ll be limited to VA or USDA loans, both of which are available only to borrowers who meet very specific eligibility requirements.
