Your down payment is one of the most important things to consider when buying a home.
But figuring out how much you should save can be a challenge, especially if you’re pursuing homeownership for the first time.
How much you should save for a down payment depends on a variety of factors, including the type of mortgage you’re applying for, the loan amount, your financial situation, and the price of the home you’re purchasing.
In this post, we aim to help you determine how much you may need to put down for your house and how to save for your down payment in the first place.
How Much Do You Need for a Down Payment?
There’s no one-size-fits-all down payment amount. How much you’ll need to save will differ from another borrower because all real estate prices are different, and home values are influenced by a variety of factors.
With that said, let’s look at the different down payment options that are available to you. The first option we look at is a higher down payment — which you can think of as a funding fee that often results in lower monthly payments over the life of the loan.
Benefits of a Higher Down Payment
You may have heard that you should put down at least 20% of the home’s purchase price. That’s because it’s usually the most ideal option, for a variety of reasons:
- Increase your chances of getting your loan approved. A bigger down payment gives you a better chance of home loan approval than if you had a low down payment. This shows lenders that you’re a good saver, which means a lower credit risk.
- Take advantage of lower mortgage rates. A higher down payment reduces your loan-to-value (LTV) ratio, a figure that lenders use to determine how much risk they’re taking on with a loan. A lower LTV ratio typically means lower interest rates — and lower monthly mortgage payments.
- Pay your loan off sooner. The more money you can put down on your home, the less you’ll end up owing on your loan. This means that you can pay off the rest of your mortgage faster, which prevents you from having to spend even more on mortgage interest and allows you to build equity faster.
- Get a lower mortgage payment. It bears repeating: The higher your down payment, the lower your mortgage will be every month.
- Avoid paying for private mortgage insurance. If you put down at least 20%, you likely won’t have to get mortgage insurance. Putting down less than 20% means the lender won’t have as much protection. Lenders often offset this risk by requiring borrowers to pay for private mortgage insurance (PMI). If you want your monthly income to stretch the farthest it can, you’d be wise to avoid having to pay for PMI.
How much down payment do I need?
Even though it’s probably best for home buyers to put at least 20% down on their home, it may not be feasible for every homeowner — particularly folks with massive credit card debt. Plus, there are many mortgage loan options — including government-backed loan programs available through the Federal Housing Administration (FHA), Fannie Mae, and Freddie Mac — that allow borrowers to put down less money while still securing a home.
In fact, across the entire housing market, the average down payment is less than 20%. According to a recent report, the average down payment on a home in 2021 was just 7% for first-time home buyers and 17% for repeat buyers. Why? Because most borrowers can get mortgage lenders to sign off on loans that have much smaller minimum down payment requirements than 20%.
The Minimum Down Payment
Down payment requirements typically depend on the lender you use as well as your credit health and debt-to-income (DTI) ratio.
To get a better idea of how much you can put down, let’s look at the minimum down payment requirements for different types of mortgage loans:
- Conventional mortgage loans: With a fixed-rate conventional loan, your down payment could be as low as 3%. But the catch is you’ll have to pay private mortgage insurance premiums each month until you’ve accumulated 20% home equity.
- FHA loans: For an FHA loan, you only need a down payment of 3.5% of the purchase price if you have a minimum credit score of 580 (10% if your FICO score is between 500 and 579). For this type of loan, you’ll have to pay both an upfront mortgage insurance premium and an annual premium over the course of your loan.
- VA and USDA loans: Loans backed by the Department of Veterans Affairs (VA) and U.S. Department of Agriculture (USDA) don’t require a down payment. If you’re looking for a new home and are a military veteran, service member, or surviving spouse, you may qualify for a VA loan. To qualify for a USDA loan, you must purchase a property in an eligible rural area.
- Jumbo loans: If you’re looking to get a mortgage for a more expensive property with a higher sales price, you may need a jumbo loan. These loans tend to have higher down payment requirements and you may need to put down at least 10% of the purchase price.
How can you save for a down payment?
Unfortunately, saving for a down payment can be tricky — particularly in a world with higher interest rates. But with some sacrifice and dedication, it’s definitely possible.
The first step to saving for your down payment is to determine how much you need. Consider the type of loan you want to apply for and the purchase price of your desired home. Then, think about a realistic timeline in which you can achieve your savings goal.
For example, imagine that you want to buy a home in three years, the homes you’re interested in are worth about $400,000, and you want to put at least 10% down. That means you should save about $1,100 a month to hit that goal. (Of course, your specific situation may vary. Look for mortgage calculators online to crunch the numbers that apply to your unique circumstances.)
So, the next question is, where will you get the extra cash? If you don’t have it, try to cut spending, stick to a budget, and automate your savings. And remember, even if you can cover the down payment, you’ll still be on the hook for closing costs.
Still can’t find the extra cash? Consider a side hustle or even request a raise at your current job. If worst comes to worst, you can also apply for a down payment assistance program or down payment loan.
Ultimately, there’s no set amount of money borrowers should put down when purchasing a home. But one thing is certain: It takes some dedication and commitment when making such a big investment decision and saving up for it.
When it comes to saving for a down payment, it’s best to take your time to save as much as you can. This will allow you to make your dream purchase. When you do, you’ll be happy you waited.