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Down Payment: What It Is And How Much You Need

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Published on December 3, 2020
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*As of July 6, 2020, Quicken Loans® is no longer accepting USDA loan applications.

A down payment is one of the largest costs you’ll face upfront when buying a home.

Understanding what a down payment is, when you’ll need one and how much to put down will help you get the most out of your mortgage.

What Is A Down Payment?

A down payment is a certain amount of money, expressed either as a percentage of the purchase price or as a flat amount, that is paid upfront for a good, service, loan or piece of property. When you buy a house with a mortgage, the down payment is the portion of the purchase price that you pay upfront, like a good-faith deposit on the home. The rest of the payment price is covered by your mortgage loan. The larger your down payment, the less you have to borrow from your lender.

For example, if you’d like to buy a $200,000 home and are eligible to borrow $180,000 from a mortgage lender, you’d make a down payment of $20,000 upfront. You’d then repay the lender the remaining $180,000, with interest, over time.

You’ll pay your down payment, along with other fees, when you close the loan. Because the down payment is a large amount of money, your lender will usually ask you to pay it with a certified check from your bank, a cashier’s check or a wire transfer.

What Is The Average Down Payment On A House?

According to HousingWire, the average down payment on a home in the last 5 years has been 5% – 7% of the purchase price. The publication also states that for the past 18 years, the average down payment has been below 10%. The average down payment took its lowest dip to 2.6% in 2009, most likely influenced by the Great Recession.

While 5% – 7% is the average, it doesn’t mean you must put that percent down on your own purchase. Depending on the type of loan you get, you may be able to put down less than 5% and you are always allowed to put down more than that – as much as you want.

How Much Should I Put Down On A House?

There are many factors to consider when deciding how much money to put down on a house. Of course, the type of loan you get will ultimately determine the minimum down payment requirement. Is it better to put a large down payment on a house?

You don’t want to use all of your savings, borrow money or dip into other areas of your budget to make the payment. That said, the larger the down payment, the lower your monthly private mortgage insurance (PMI) bills. If you have the money to make a bigger down payment, it will be up to you to decide if you wish to save money upfront by making a smaller down payment, or save more money over time by making a big down payment.

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The Big Down Payment

Making a big down payment can be scary, especially for first-time home buyers, but it may pay off in the end. Here’s what you should consider before signing off on a large down payment check.

Pros Of A Big Down Payment

The perks of a larger down payment on a home loan are plenty, but here are just a few:

Lower monthly payments. A monthly mortgage payment consists of your loan balance, interest, PMI and escrow. The more you put down, the less you borrow, which automatically lowers your payment because you owe less. If you put at least 20% down, you will also avoid paying a PMI and, for some loans, you can also avoid a monthly fee that goes into an escrow account. Keep in mind that if you decide not to pay for escrow each month, you’ll still need to pay your taxes and insurance out-of-pocket and will be responsible for making that payment yourself.

Lower debt-to-income ratio. A lower debt-to-income ratio makes your debts more manageable and provides more money each month for you to enjoy, use for other obligations or weather a storm. It also provides you better borrowing power for other loans or future endeavors.

Less overall interest payment. With less money borrowed, the less interest you’ll pay and that includes over the life of the loan. Additionally, a bigger down payment typically affords you a lower interest rate because your loan is seen as less risky. You may also be able to pay your loan off sooner, which can save you months or even years of interest payments.

More equity in the home. Equity is the amount of your home value that you actually own, a.k.a. the unborrowed amount of your home value. The money you pay in a down payment adds to the equity in your home, which increases your potential for a home equity line of credit. That’s because you’ll be able to build equity in your home faster, which you can then borrow from with this type of loan.

Cons Of A Big Down Payment

Saving money is great, but making a big down payment does have its drawbacks, too. For example, a big down payment can:

Delay your home purchase. Since a big down payment requires more money, it may take longer to save up, which could delay your home purchase.

Drain other funds. You may be tempted to pull from other places, like an emergency fund, to make the payment – but you could be shorting your other accounts. This can be a problem when you need to access those accounts for an emergency or home repair. Tying your available cash up in your home puts you at risk for going into debt if something unexpected happens.

Only provide some benefit. The money-saving benefits of a big down payment don’t happen right away. They’re more long-term, so if you don’t stay in the home for a long time, you may not even experience the full benefit of a big down payment.

The Low Down Payment

Whether out of necessity or strategy, putting a smaller amount of money down can be tempting. Consider the following advantages and disadvantages before making a decision.

Pros Of A Low Down Payment

Low down payments allow people who may not otherwise be able to afford it to purchase a home. With a lower down payment, you may also be able to:

Purchase earlier. The less money you have to save, the faster you can get to your goal and the sooner you can buy a home.

Pay other mortgage expenses. Paying less on your down payment may provide funding for other mortgage costs, like the home appraisal and inspection – both necessary expenses that you’re responsible for paying out of pocket.

Better prepare for unexpected costs. With a lower down payment, you can save some of your money to keep in an emergency fund or to prepare for home repairs and maintenance.

Increase home value. Instead of sinking capital to pay off the principal, you can spend money renovating your home and increasing its overall value. If you have construction or gardening skills, sweat equity can pay off big.

Cons Of A Low Down Payment

There are a few drawbacks to making a low down payment. These include:

Higher monthly payments. As stated above, a monthly payment includes your loan balance, interest, escrow and PMI. When your down payment is less than 20%, you cannot avoid any of these fees. On top of that, you’ll typically pay a higher interest rate.

Higher DTI. Since you’ll be borrowing more money, you’ll have a higher DTI. This may cause some financial discomfort as you have more debt to deal with each month. It also gives you less future borrowing power, since the higher your DTI, the more of a risk you are to lenders.

Higher overall interest payment. When you borrow more money, there’s more money to be charged interest on. It may also take you longer to pay off your loan and, the longer you make payments on your loan, the longer you’re charged interest on it.

How Much Down Payment Is Required On A House? (By Loan Type)

Every loan type has its own down payment requirements. These can vary by lender, as well. Your down payment also plays a role in other costs, like mortgage insurance. Here is how a down payment works with some popular loan options offered.

Minimum Down Payment On A House By Loan Type

Loan Type
Required Minimum Down Payment
Conventional Loans
3%
FHA Loans
3.5%
Jumbo Loans
20%
VA Loans
0%
USDA Loans
0%

 

Conventional Loans

Conventional mortgage loans, like a 30-year fixed and 15-year fixed, have guidelines set by government-backed housing finance companies Fannie Mae and Freddie Mac. These loans typically have stricter eligibility requirements than government-backed loans like FHA loans. With some lenders, a first-time home buyer can qualify for a down payment as low as 3%.

FHA Loans

FHA loans are government-backed loans with relatively flexible guidelines set by the Federal Housing Administration. You can get an FHA loan with a down payment as low as 3.5%.

If you buy a home with an FHA loan, and your down payment is more than 10%, you’ll have to pay monthly mortgage insurance for the first 11 years. If your down payment is less than 10%, you’ll continue to pay MIP until you refinance to another loan type or pay off the loan.

Jumbo Loans

Jumbo loans are mortgages for more than the loan limit, which varies based on location and property type. In most of the United States, the loan limit for a single-family home is $548,250 for 2021.

Because these loans are for such large amounts, they require a larger down payment – usually at least 20% of the purchase price.

VA Loans

VA loans, backed by the United States Department of Veteran Affairs, help veterans and their spouses buy homes. A VA loan does not require a down payment, which makes it a great option if you are eligible for one.

Unlike a conventional or FHA loan, a VA loan does not require mortgage insurance with a smaller down payment. Instead, you will pay a funding fee to help support the loan program. VA funding fees are typically less than mortgage insurance, and you may be able to waive the fee if you’re receiving VA disability or are a surviving spouse. If you're a Purple Heart recipient serving in an active-duty capacity, you're also exempt from the funding fee.

USDA Loans

USDA loans, backed by the United States Department of Agriculture, are available for homes in rural areas. USDA loans don’t require a down payment, making them a great choice if you meet USDA loan income requirements and are considering a home in a qualifying area.

When you get a USDA loan, you’ll also pay an upfront guarantee fee and an annual guarantee fee. These fees help support the loan program and are typically lower than the mortgage insurance you’d pay with a conventional or FHA loan.

What Is Down Payment Assistance?

If you could use a little help making your down payment, there are down payment assistance programs available at a local and national level. These programs offer funding, typically from the government, nonprofits, unions or even employers or lenders, that reduce the amount of money you need to put down. Some programs are more like loans or second mortgages you pay back (sometimes not until you move or refinance), while others are grants that you don’t have to pay back. Common eligibility requirements are typically a minimum credit score and a certain household income threshold that is based on the area’s median income.

There are down payment assistance programs across the country, including for first-time home buyers. For programs in your state, check out the FHA’s list of down payment grants for 2020.

The Bottom Line

Determining a down payment amount that is most suitable for your needs will greatly depend on what you can afford, when you want to begin the home buying process and what your other financial goals are. Take the time to determine what you feel comfortable paying and how you’re going to pay it. To learn more about down payments and have your questions answered, speak with a home buying expert today.

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Call our Home Loans Experts at (800) 251-9080 to begin your mortgage application, or apply online to review your loan options.

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