How Much Down Payment Do I Need To Buy A House?

If you’re thinking about buying your first home, it’s likely you’ve heard the advice that you need to first save up a 20% down payment. While the 20% figure has its advantages and disadvantages, it’s not a requirement in most cases.

What is a down payment?

A down payment is the part of the home purchase price that you pay upfront (at the time of closing). The balance of your purchase price is then typically paid with a mortgage loan, which enables you to make payments over a longer period of time. 

Mortgage lenders collect down payments (which are often expressed as a percentage of the sale price) to reduce the risk of default on their loans, although there are some zero-down programs available (more on that later).

Do I need to put 20% down?

A 20% down payment is not required to buy a house, but it is an important threshold to understand. When you take out a conventional loan with a mortgage lender, they will typically arrange for private mortgage insurance (PMI). This insurance payment gets tacked on to your mortgage payment and protects the lender if you stop making payments on your loan. If you can afford 20% down on your loan, you save yourself some money by not having to pay PMI.

What are the other advantages/disadvantages of a larger down payment?

Since your down payment decreases the amount of money you need to borrow from a lender, the larger the down payment, the smaller your monthly payments will be. Likewise, you’ll benefit by paying less interest over the life of the loan.

Saving up for a large payment can be time consuming though, and some people may not want to stretch their savings too thin. If you are buying a home that’s likely to need repairs in the near future, having extra funds available may be necessary.

What if I can’t afford a large down payment?

Some conventional mortgages require as little as 3% down and FHA loans (which are backed by the Federal Housing Association) require as little as 3.5% down, depending on your credit score. Additionally, loans guaranteed by the U.S. Department of Veterans Affairs (VA) or backed by the U.S. Department of Agriculture’s Rural Development program (USDA) usually do not require a down payment (0% down) but have strict eligibility and income requirements.

Zero or low-down payment loans typically have other fees or mortgage insurance to help pay for the guarantees provided.

Making a final decision

The right down payment amount for you depends on your goals and financial situation. While it’s possible to buy a home with as little as 3% down (less if you qualify for a VA or USDA loan), you may have to buy mortgage insurance, pay additional costs and pay a higher interest rate. On the upside, the sooner you are able to purchase a home, the sooner you can begin building equity.