What’s a Down Payment and How Big (or Small) Should Yours Be?

First Time Home Buyers, Home Expenses, Real Estate

Think of your down payment as the cover charge that gets you into the homeowners club. ?

A lot of home buyers might need to get creative to pull together the cash they need for this upfront cost, but once they’re over that hump and into their new home, they know it was worth it. 

Down payments do more than get you the home. What you put down can also help your financial situation in the long run.

Before figuring out your budget for a house, it’s important to know how much down payment you can afford – and why it might make sense for you to pay less than you can afford to pay.

How Do Down Payments Work?

Your down payment pays a percentage of the home’s purchase price. Your mortgage loan pays the remaining balance. 

✅ What a down payment is: 

  • An upfront cash payment toward the purchase of a home
  • Your initial ownership stake in your new home

? What a down payment isn’t: 

  • One of your closing costs (although your full down payment is due by closing day)
  • Your earnest money deposit (EMD) – a show of good faith to the seller, money that’s held in escrow during the purchase process and may be applied to your down payment at closing

The impact of a down payment on your loan

Lenders will set your loan terms based partially on the size of your down payment. Lenders look at the amount you’re putting down on the house as a clue to how “invested” you are as a borrower. You know you’re all in, but your lender needs “proof.”

Loan Terms

These are the details of your loan, including your interest rate, length of time to pay back the loan, mortgage insurance amount, monthly mortgage payment and when it’s due each month.

In general, here’s how a higher down payment amount will positively affect two key loan terms: 

  • Interest rate: The higher your down payment, the lower your loan’s interest rate will be.
  • Monthly payment: The higher your down payment, the smaller your monthly mortgage payments will be. 

Conversely, your interest rate and monthly payments may be higher if you make a smaller down payment. 

But your interest rate and monthly payments are just two measuring sticks that can help you decide how much money you want to put down on a house.

How Could a Larger Down Payment Help You? ???

The more money you put down on a house, the more money you’ll get back if you ever sell it. 

A larger down payment can also help you save money over the life of the loan.

Along with the impact it’ll have on your loan principal and its interest rate, here are some other benefits of a larger down payment:

Who might want to make a higher down payment?

Currently, hot real estate markets are forcing many home buyers to make higher down payments than they otherwise might have. 

In general, higher down payments make sense for buyers who can comfortably make them without draining their savings. This includes current homeowners buying their next home.

Take Larissa, for example:

Buyer profile: Large-Down-Payment Larissa

Goal: Move from a tiny starter house into a bigger forever home where her something-doodle can go wild ?‍?

Money sitch: She’s been saving for a few years AND she’s confident that what she pockets from the sale of her current home will replenish what she takes from savings for her down payment.

How Could a Smaller Down Payment Help You? ??

Larger down payments have their pros, but a smaller down payment can be a strategic money move, too.

A home buyer might have a good income but is hesitant or can’t use much of their savings for a down payment. In situations like these, a smaller down payment could make the magic happen.

A smaller down payment might not move mountains, but it’s still got some tricks up its sleeve:

  • You can buy a house sooner (great for first-time home buyers).
  • If you have savings, more of it can be reserved for financial emergencies and house repairs.
  • You can also focus on saving for other big financial goals while shopping for a house.

Who might want to make a smaller down payment?

A smaller down payment can be the key to a brighter future for buyers with less in savings. 

Maybe their income and credit score has improved recently. Maybe their current situation is motivating them to buy a house as an investment in their overall happiness and financial future.

Enter, Sadia. She’s ready to make a move with a 3.5% down payment on a Federal Housing Administration (FHA) loan:

Buyer profile: Small-Down-Payment Sadia

Goal: Say goodbye to roommates, become a first-time home buyer, do a happy dance ?

Money sitch: Her income leaves room for monthly payments – even on the higher end for her house budget – but her savings are on the low side.

What Is the Average Down Payment on a House?

According to Attom Data Solutions, Americans who buy a house with a loan make an average down payment of around 7% of the home’s purchase price.

Back in the day, you pretty much needed to put down 20% of the home’s purchase price, but things have changed. To encourage homeownership, many loan types now allow MUCH lower down payments. 

For as little as 3% down, you can be approved for a variety of conventional loans.

Keep in mind that not all borrowers will qualify for a loan type’s minimum down payment.

If you’re just squeezing into qualifying for a conventional loan with a credit score of 625 (the minimum required is 620) and your DTI is high, your lender may require a higher down payment. 

Don’t worry, though. It’d still probably be closer to 6% than 20%. ?

So How Much Do You Actually Need for a Down Payment?

You may also be eligible for a lower down payment with a loan type that doesn’t require as high of a credit score as a conventional loan might. FHA loans, for example, are available to borrowers with scores as low as 500.

The exact down payment percentage you’re required to pay will mostly depend on how good or poor your credit is, what your debt-to-income ratio is and what your lender’s policies are. 

Down Payments: How Low Can You Go?

The Loan The Tea The Minimum Down Payment Required
Conventional Loan The most common type of mortgage for home buyers  3%
FHA Loan Popular with first-time home buyers 3.5%
Veterans Affairs (VA) Loan Serves veterans and their families with generous loan terms 0%

Down payment example

Let’s look at a few of the down payment amounts that are commonly put down by home buyers, from the 3% that’s possible with a conventional loan to the ol’ 20% number that some buyers are currently paying in hot real estate markets – but no pressure. Do your thing!

Here’s what some hypothetical down payment example percentages could mean in actual dollars paid upfront – and the resulting loan amount you’ll have to pay back. ? 

Down payment example: The higher you go, the less you’ll owe

Purchase Price: $200,000

Down Payment (As % of Purchase Price) Down Payment (In Dollars) Loan Amount Owed (Not Including Interest) 
20% $40,000 $160,000
10% $20,000 $180,000
6% $12,000 $188,000
3% $6,000 $194,000

How much down payment can you afford?

Technically, you can afford whatever you have in your savings account. 

But you also need to consider how much you’ll need in savings for closing costs – another upfront payment you’ll need cash for. 

Closing costs are usually around 3% – 6% of the home’s purchase price and are paid on closing day. Any money left over after taking care of your closing costs is fair game for your down payment. To help free up more savings for your down payment, consider a no-closing-cost mortgage.

You can use an online mortgage calculator to help you land on a down payment amount that you can realistically afford and keeps your monthly payments within your budget.

What Are Some Alternatives to a Large Down Payment?

If you want to get the benefits of a larger down payment (like a lower interest rate) but don’t think you’ll be able to save up enough for one any time soon, consider one of the following options:

  • Find looser requirements: Apply for a loan type with a lower down payment requirement (see table above).
  • Accelerate your monthly payments: Pay a lower down payment, but as your income increases in the future, pay more than your minimum monthly payment to lessen the amount you’ll pay in interest over time. (The quicker you lower your loan’s principal balance, the less balance there is for interest to be applied to. ?)
  • Refinance your mortgage: Put down a smaller down payment and pay the higher interest and monthly payments until you’re in a better financial position and can refinance with better loan terms.

Where Will Your Down Payment Come From? 

There are different ways to come up with the down payment:

  • Savings: Start saving what you’ll need ahead of your house hunt. Set this savings goal in your monthly budget (and in stone). 
  • Gift money: Get money as a gift to help cover the upfront costs of buying a house. It can come from family, friends, employers, government agencies or charitable organizations.
  • Extra work: Consider freelancing or getting a part-time job until you’ve reached your down payment goal.
  • Extra cash: Many home buyers sell whatever they can part with to help scrape up enough cash to get into their first home.
  • Down payment assistance programs: Qualifying first-time home buyers can get down payment help through national or local government programs and charitable organizations.
  • Home equity: If you own a home, selling your current house could score you enough cash to put toward your next home’s down payment.

One thing that’s rarely an option is taking out a personal loan for a down payment. Lenders usually won’t allow this. If your lender okays it, there will be strict policies around it. And you’ll be adding another monthly payment – complete with interest – to your budget.

Are You Down To Pay a Down Payment?

Buying a house is a huge financial commitment – and scraping together a down payment ain’t helping. ?

Are you ready to put enough money down? 

Before you start falling in love with houses in a certain price range, make sure you’ll be able to pay the down payment for that purchase price. ?

Online mortgage calculators can help you figure out what to aim for but be sure to talk to a lender that can help you target your options. 

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