Jun 14, 2023
“Down payment”: Ask most people what is an acceptable down payment on a house, and nine times out 10, they’ll tell you it’s 20% of a home’s selling price.
So you do the math, and realize you’d have to put down $50,000 on a $250,000 house! How will you ever scrounge together that much cash?
Well, chin up, buckaroo. That 20% figure is common, but it’s not set in stone. In fact, according to a new report by Realtor.com, in 2019, the median down payment on a house amounted to only 13% of the sales price in the first three months of 2023. And that’s down from the peak of 14.1% in the second quarter of 2022.
Plus, that’s the down payment among all home buyers, but if you look at first-time home buyers in particular, they typically make a down payment amounting to only 6% of a home’s price (repeat buyers put down 16%).
Sure, there are many reasons why you should make a 20% down payment on a house. But most banks will allow you to put down less—and yes, you can put down even more if you’re feeling flush.
Let’s take a look at the pros and cons of making a number of different down payments on a house.
When your down payment is under 20%
If you are unable to make a 20% down payment, there are many lenders that will allow you to make a smaller down payment on a house. Here are those options:
- FHA loans. The Federal Housing Authority (FHA) offers mortgages with as little as 3.5% down, if your annual income is under a certain amount that varies by market.
- USDA loans. The U.S. Department of Agriculture will allow you to put 0% down on eligible homes, usually in rural areas. And your income must meet certain low requirements.
- VA loans. Veterans can put $0 down. (And on average, 20% of homebuyers are veterans).
Although you can find decent terms when you put less than 20% down, remember that since you’ll be financing a greater amount, no matter how favorable the terms you negotiate, your payments will be higher. And you’ll be paying more interest, so the home will ultimately be more expensive.
When your down payment is 20%
It might sound like a huge chunk of change, but you’ll ultimately end up paying less if you make a 20% or higher down payment on a house. That’s because when you put 20% down, you won’t have to pay private mortgage insurance, which can add several hundred dollars a month to your house payments.
“Mortgage insurance exists because the lender … assumes additional risk when a homeowner’s equity stake is small,” mortgage banker Craig Berry explains in The Mortgage Reports.
Both private lenders and the Federal Housing Administration have mortgage insurance plans. No matter which you chose, you’ll likely have to pay a one-time fee upfront and then another amount of money that will be tacked onto your monthly mortgage.
The only good thing about mortgage insurance is that it doesn’t last forever. When your loan-to-value ratio is 80% (or you have paid the equivalent of 20% of your home’s value), you can ask your lender to stop charging you for the insurance. Once the loan-to-value ratio reaches 78%, the lender is legally obligated to cancel it.
Another advantage of making a 20% down payment on a house is that that’s often the magic number at which point you’ll get a more favorable interest rate. So you can see the various advantages to saving up for that 20% down payment if it’s possible.
When your down payment is over 20%
People who inherit a windfall sometimes choose to put more than 20% down, so their payments will be lower and they can avoid mortgage insurance payments.
But others, with very low credit ratings, are required by the lender to put more than 20% down.
And if your credit score is under 620, you’ll probably have to put more than 20% down to get a conventional loan.
Down payment hope and help
There is a surprising amount of down payment and home loan assistance out there for those in need. It comes in the form of low-interest-rate loans, grants, and tax credits. According to Sean Moss of downpaymentresource.com, in some cities, you can get as much as $100,000 in assistance for purchasing your first home.
Of course, most of these programs depend on factors like your income, a maximum home price, and even your profession. Ask your real estate agent about the types of programs that you may be eligible for.
For most people, a home is the biggest financial commitment they’ll make, but don’t let that intimidate you. If you’re serious about owning your own place, there are lots of resources out there to help make this into a reality.