How Much Is a Down Payment for a House? 5%, 10%, 20%? Roger Odoardi How much is a down payment for a house? If you’ve dipped any toes into the water of homeownership, you have probably asked yourself this question. Making a down payment on a home is an important step, but it can also seem like one of the biggest hurdles in the journey towards buying a home. But a down payment does not have to be intimidating, for many reasons—some of which are within the buyer’s control. The down payment amount can depend on a range of factors, including: The type of home loan you get, whether it’s a conventional loan or government-insured loan like VA, FHA or USDA. Your lender. What kind of rate is your lender offering you? Your priorities. Are you looking for a competitive edge against other home buyers? Are you looking for a lower monthly payment? Do you need to keep cash reserved for savings and maintenance? Your particular situation certainly impacts the percentage amount you put down on a house. With the right information about the housing market in 2023, you can stop wondering how much to put down on a house, and instead focus on the things that matter. What Is a Down Payment? You probably have heard of a “down payment,” but you may not be entirely clear on what it means. We’re here to help. A down payment is a lump cash payment made upfront to make a large purchase, such as a home or a vehicle. The down payment gets the ball rolling on securing ownership and laying out plans for the rest of the financing. After the initial down payment, the remaining cost of the purchase is usually financed through a loan, which can be secured in myriad ways such as through conventional or jumbo loans, as well as government-insured loans. The amount of the upfront down payment can impact the duration of the loan and how much is owed per month. Understanding Down Payment On a House So, how do down payments actually work, usually? The down payment represents the home buyer’s initial ownership stake in the house. They are usually presented as a percentage of the price of the home (5%, 10%, 20%, etc.), and then a home loan or a mortgage is typically used to pay the remaining balance. Most mortgages require a down payment, but it is important to note that not all do—some mortgages backed by the federal government may not require a down payment. So, a down payment gets the ball rolling. It gets you started on your home ownership and dictates the terms of how the rest of the home’s purchase price will be paid off. Down Payment and LTV Ratio When understanding down payments, it is critical to understanding loan-to-value (LTV) ratios. The LTV ratio is a simple equation, equal to the amount of the loan divided by the appraisal value or the purchase price of the house (whichever is the lesser value). The LTV ratio essentially tells you how much you will owe on the home after your down payment is made. A higher down payment not only lowers your loan amount, it also lowers your LTV ratio. This is important because lenders consider your LTV ratio when deciding whether or not to extend the loan. How Your Down Payment Impacts Your Offers You may be wondering: The market is crazy right now, can the down payment impact my chances of securing the house I want? How does it affect my offer? The down payment can affect your ability to beat out other offers. From the seller’s perspective, a higher down payment is more attractive, because it means the buyer has more skin in the game. A higher down payment offer can indicate to the seller that you have enough cash on hand, as well as good finances that can be approved by a mortgage lender. Not to mention, a higher down payment could beat out other offers that are below the asking price. So while there are certain advantages you can get from a lower down payment, a higher number undoubtedly increases your chances of securing the house you’re after. Understanding PMI What is PMI? PMI is private mortgage insurance, and it is required for conventional loan borrowers who make lower down payments on a home purchase. PMI protects the lender in the event that you stop making payments on your home loan. When you make a lower down payment on a house, a lender can be wary of your ability to pay off the remaining balance. So private mortgage insurance is required. Generally, making a down payment of 20% or more can help you avoid having to buy private mortgage insurance. If 20% is not feasible, it’s usually acceptable to ask your lender to remove PMI once you reach 20% equity in the house through loan payments. Do you need to put down 20%? Now that we’ve gone over the various elements of a down payment and subsequent loan (and mortgage), you are probably wondering how much is the right amount to put down on a house. A 20% down payment is generally the line of demarcation on what constitutes a low vs. high down payment number. While very few lenders require a 20% down payment, there are some advantages to putting down at least 20%. In order to determine whether it makes sense for your particular situation, you will need to weigh the pros and cons of doing so. Pros and Cons of 20% Down Payment To help you weigh the pros and cons of a 20% down payment, we’ve put together a generalized list: Pros No private mortgage insurance (PMI), as required by the lender for payments less than 20%. Better interest rates. Lower monthly payments. Competitive edge over other home buyers. Cons Financial risk. If you need cash for an emergency or savings, putting large sums of money into a down payment can be risky. By making a big down payment, you may have less money to spend on repairs and other maintenance issues on the home you’re buying. These issues will inevitably crop up! It can take a while to save up the money needed for a 20% down payment. Low Down Payment Loan Options Most loan programs in 2023 do not require a 20% down payment. The national average for a down payment is around 12% of the purchase price of the home. For first-time home buyers, that number drops to around 7%. For home buyers who can afford these averages—but not the 20% as discussed above—there are many options for loans, from both conventional lenders and government-backed programs. Let’s get into the various lending options for prospective home buyers, so you can determine which is right for you. Conventional Loans Read on for a breakdown of conventional loan options for home buyers, and the benefits and risks associated with each. Fannie Mae/Freddie Mac Programs (Source) Fannie Mae and Freddie Mac are common for many home buyers. They only require a 3% down payment for home buyers with strong credit, and Fannie Mae’s HomeReady mortgage program allows a 97% LTV for borrowers with a minimum credit score of 620. Freddie Mac’s Home Possible Advantage mortgage offers the same LTV rate for borrowers with a minimum credit score of 660. Jumbo Loans Jumbo loans are for purchases larger than what a conventional loan will cover. Because the purchase price is higher, the loan is larger, therefore presenting more risk to the lender and upping the expected down payment. Borrowers should expect to put down between 10% and 20% for a jumbo loan. If your credit score is 700 or higher, you can expect to get the best pricing. Some lenders will work with jumbo borrowers who have a minimum score of 660. Additionally, some lenders may require jumbo borrowers to have at least a year’s worth of the purchase price of the house in cash or other assets. Government-insured Loans There are a number of loan options for borrowers from programs that are government-insured. These programs, because they are backed by the government, are intended to help individuals from lower income brackets or with lower credit scores purchase a home. FHA Loans FHA loans require as little as 3.5% down with a minimum credit score of 580. They will also consider borrowers with non-traditional credit histories if the borrower fulfills a few requirements, such as 12 consecutive months of on-time rent payments, no more than one 30-day late payment to other creditors and no collections filed in the last 12 months. VA Loans VA loans are for U.S. military service personnel, veterans and their families, and offer a benefit of 0% down for those that qualify. USDA Loans A USDA loan is a government-backed, no-money-down mortgage for buyers purchasing homes (generally) in less dense parts of the country. The 0% down payment is only if the property meets the USDA’s eligibility rules. What Are the Minimum Down Payment Requirements? Depending on the situation, there are numerous minimum down payments requirements that a potential home buyer should be aware of. For primary properties, i.e. a new home that you are buying for yourself or your family and the most common type of home purchase, requirements depend on the individual lender and can range depending on the credit score. The minimum down payments and credit score requirements differ from conventional loan, to jumbo loan, to a government-insured loan such as FHA, VA and USDA. For secondary properties, i.e. second homes, conventional loans require a 10% minimum down payment. Government-insured loans are usually not an option for secondary home buyers. For investment properties, or homes specifically being used for investment purposes, the minimum down payment raises to between 15% and 25% depending on your credit score. Government-insured loans cannot be used for investment properties, with the exception of VA loans, which can be used if the home buyer is financing the purchase of a multifamily home and will use one of the units as their permanent residence. Can You Buy a House Without a Down Payment? A down payment is pretty much a requirement if purchasing a house through conventional means. As discussed above, some government-insured loans including VA and USDA offer a zero money down option, but they come with their own set of requirements and eligibility restrictions. Generally, you should expect to pay a down payment during the process of purchasing a home, assuming you are not using a VA or USDA loan. How Much Should You Put Down On a House? So, finally, we reach the grand question: How much should you put down on a house? As you may have gathered from this article, there is no right answer to the question. It completely depends on each home buyer’s circumstances and priorities. Things like your cash liquidity situation, the interest rate you’re hoping to get, the purchase price of the house, your location, lender, and whether you’re in the military or on some government-insured loan program all play a role in how much your down payment will be. Hopefully, this article has helped you gain a clearer understanding of all the factors at play in deciding how much to put down on the house of your dreams. To talk to a mortgage broker at Blue Water about all the options you have for purchasing a house, contact us today. FAQs Is it better to put a large down payment on a house? That depends. Putting down a larger percentage on a house creates a number of advantages both in the short term and the long term, but many lenders and loan programs require as little as 3% down on a house, so a larger amount is not required. How much money do I need to buy a house for the first time? How much you need depends on the price of the house, the loan program you are using to secure a loan, and the percentage down payment you are willing to pay to show your interest in purchasing the home. What if I can’t afford a down payment? If you cannot afford a down payment, there are a number of government-insured options that do not require money down to purchase a home, but they come with eligibility requirements. Roger Odoardi Roger is an owner and licensed Loan Officer at Blue Water Mortgage. He graduated from the University of New Hampshire’s Whittemore School of Business and has been a leader in the mortgage industry for over 20 years. Roger has personally originated over 2500 residential loans and is considered to be in the top 1% of NH Loan Officers by leading national lender United Wholesale Mortgage.