Many people feel like they are stuck renting because saving enough money for a down payment to buy a house seems unattainable to them. While many people still believe it is necessary to put down 20% when buying a home, that is not always the case. In fact, lower down payment programs are making homeownership more affordable for new home buyers. In some cases, you might even be able to purchase a home with zero down.

What Is a Down Payment?

A down payment is the cash you pay upfront to make a large purchase, such as a home. When making a large purchase, many buyers will pay some of that cost upfront in the form of a down payment in order to reduce the amount of money to be financed.  A down payment can significantly reduce the amount the borrower owes to the lender, the amount of interest they will pay over the life of the loan, and monthly payment amounts.

Why Do You Need a Down Payment?

A down payment is typically required on a home to reduce the lender’s risk, demonstrate the buyer’s commitment, and lower the loan amount, leading to better loan terms and a smaller mortgage. Traditionally, a mortgage down payment is at least 5% of a home’s sale price. House down payments are often, but not always, part of the normal homebuying process. If a buyer puts 10-20% down, the theory is that they may be more committed to the home and less likely to default.  If there is more equity in the property, the lender is more likely able to recover its loss in the event of foreclosure.

Do You Need to Put 20% Down On a House?

You may have heard that a 20% down payment is always required when buying a home. In fact, that number is really just the threshold many lenders use for requiring mortgage insurance on a conventional loan. When lenders issue mortgages with down payments of less than 20%, nearly all require borrowers to buy private mortgage insurance (PMI) on the loans. Because loans of more than 80% of a home’s purchase price are considered risky, lenders require PMI to guard against losing money in case a borrower defaults and they must seize and resell the property.

Just keep in mind that making a lower down payment can help you achieve your goal of homeownership more quickly. However, a higher down payment brings down the principal (and lifetime interest payments), which might cost you less throughout the life of the loan. Weigh the pros and cons to decide what’s best for you.

In 2023, the typical down payment for first-time home buyers was 8%, according to the National Association of Realtors. The typical down payment was 19% for repeat buyers.

Type of Loans

Different strokes for different folks, right? Well, the same goes for loans. Here are the most common loan types to know about and how much each requires for a downpayment:

  • FHA loans: Perfect for those with less saved up or lower credit scores, you can go as low as 3.5% down.
  • Conventional loans: Typically, these start at 3% down for first timers.
  • VA and USDA loans: If you’re a veteran or buying in certain rural areas, you might qualify for zero down.
  • Jumbo Loans: These loans are for properties that exceed the county’s threshold amount for a conventional loan. They typically require 10% to 20% down.

How Credit Score Impacts Your Down Payment

Your credit scores and overall financial situation can significantly impact the homebuying process. Lower credit scores may limit how much money you can borrow and could lead to higher interest rates or PMI premiums. A strong credit score also means lenders are more likely to be lenient in areas where you may not be as strong, such as your house down payment. Your credit score shows you have a proven history of making payments on time and that you’re less of a risk. In these instances, they might allow you to get a great interest rate while making a smaller down payment.

Before you begin the homebuying process, check your credit reports and credit scores to get an idea of our credit health, as well as to review the information being reported by lenders and creditors. Allow yourself enough time to address any information on your credit reports you believe may be inaccurate or incomplete. Some advance planning may make a big difference when it is time to purchase a home.

Benefits of a Larger Down Payment

Larger down payments can seem like a high priority because they typically result in paying less interest over time and eliminating private mortgage insurance (PMI) fees on a conventional loan (assuming the down payment amounts to at least 20% of the purchase price).

But making a larger down payment has advantages that include:

  • A better mortgage interest rate. Lenders may shave a few percentage points off your interest rate if you make a larger down payment.
  • More equity in your home right away. Your home equity is your home’s value minus the amount you owe on your mortgage.
  • A lower monthly mortgage payment. Borrowing less of your home’s price lowers your principle, which also means you will pay less interest over the life of the loan.

Considerations to Determine Your Down Payment

How much do you need for a down payment, then? Use an affordability calculator to figure out how much you should save before purchasing a home. You can estimate the price of a home by putting in your monthly income, expenses and mortgage interest rate. You can adjust the loan terms to see additional price, loan and down payment estimates.

Here are some steps you can take before determining how much home you can afford and how much you can put down on a house:

Determine how much you can afford

The first step is to figure out how much money you have available for upfront home costs. If you haven’t already, gather your most recent savings and investment statements so you start with an accurate number. As you decide how much you can spend, make sure you still have enough money available for emergency savings, other savings goals, and closing costs.

You might be tempted to put down the maximum down payment that you can afford. However, it’s important to have emergency savings and cash on hand to pay for unexpected expenses and critical home maintenance. A good goal is to build up an emergency fund with at least three months of living expenses before you move in.

Type of Mortgage

The type of mortgage you choose can also impact how much money you put down, because some have down payment requirements. VA loans, for example, can offer zero money down. Some conventional loans can go as low as 3%, while FHA loans can go as low as 3.5%. Jumbo loans typically require a 10% down payment or more.

The size of your down payment will also be influenced by whether this house will be your primary residence or a vacation or investment property.

Consider Your Options

After evaluating your budget and what you need from your home, it is time to consider all your options. You might need to look for a loan option that allows a smaller down payment, or you might want to give yourself more time to save up for a larger down payment on a house.

It can be beneficial to work with someone who knows the answers to all these questions. A home lending advisor can help you understand the different types of mortgages available and go over down payment requirements for each type of loan to find the right one for your financial situation.

Future Goals

Consider your future goals and aspirations. Will a larger down payment deplete your savings and hinder other financial plans? Finding the right balance between homeownership and other financial goals is crucial.

Find the Right Agent

Windermere’s community of real estate professionals is our greatest asset. We have experts in all areas of real estate, from your typical starter home to condos, luxury properties, and new construction. While residential real estate is the mainstay of our business, Windermere also has offices and associates who specialize in property management, commercial real estate, and relocation services. To further facilitate the home buying process, Windermere has affiliated partners in certain regions to provide mortgage, title, and escrow services.

Call us today with any questions or concerns. Our professional Real Estate Agents will help you through this exciting process. (951) 369-8002