Looking to buy a home? An important first step is figuring out how much to put toward a down payment. Your down payment is paid upfront and will impact your loan amount, interest rate, monthly payment amount, and whether you’ll need to pay mortgage insurance on your loan.
Traditionally, 20% is the magic number for a down payment. Putting down 20% of a home’s purchase price not only pleases lenders, but it can minimize your loan’s interest and fees, and allow you to start with more equity in your home. It could also help you get approved for a home loan if you have less-than-perfect credit.
But a 20% down payment can be costly, and saving this amount isn’t always an option—especially for first-time homebuyers and borrowers who want to buy soon. The good news: Most lenders don’t require a 20% down payment, and certain government-backed loans may even waive the down payment altogether. Here’s what you need to know to decide how much of a down payment to make on your new home.
Do You Need 20% for a Down Payment?
A down payment of 20% means you’ll start your homeownership journey with more of your home paid off, which will benefit you if you decide to sell or refinance. A bigger down payment can also make it easier to get approved since you pose less of a credit risk to potential lenders.
You could also qualify for a lower interest rate, reduce your monthly mortgage payment and save a bundle in interest if you put 20% down. To illustrate, assume you get a 30-year fixed-rate loan for a home that costs $280,000, and you agree to put 5% down ($14,000). If the lender offers you an interest rate of 4%, your monthly payment for principal and interest will be $1,270 and you will pay $191,173 in interest over the life of the loan. If you make a 20% down payment ($56,000) and the lender reduces the rate to 3%, your monthly payment will drop to $944 and you will pay $115,981 in interest for the loan term.
When you put 20% down, you will also avoid mortgage insurance, which can cost up to 2% of the total loan amount annually, depending on the loan type. That’s almost an extra $300 added to your monthly payment on a $350,000 home loan. Your lender may allow you to cancel the insurance once you reach 20% equity, but some government-backed mortgages require it until you pay off the loan or refinance.
If a 20% down payment is not doable with your budget and the amount you have saved, don’t worry: Most lenders don’t require this amount to approve you for a loan.
What Is the Minimum Down Payment Possible?
Most traditional mortgage loans require at least 5% down, but you could get a government-backed mortgage with an even lower down payment. There are even special loan programs that don’t require borrowers to put any money down.
Here are some general guidelines on minimum down payments for mortgage loans:
Conventional loan: Varies by lender, but expect to put down at least 3%
Jumbo loan: Varies by the lender, but most want at least 10% down
Federal Housing Administration (FHA) loan: A minimum of 3.5% down with a 580 credit score; 10% down with a credit score between 500 and 579
Down payment requirements vary by lender, so it’s best to shop around and inquire with several lenders before applying for a home loan.
The Bottom Line
It’s possible to buy a home without a large down payment. Start preparing now by setting a savings goal and adjusting your budget to free up funds. You can also automate your savings to stay on track and explore other ways to boost your income to reach your goals even faster. It’s also important to get your credit ready for a mortgage before you apply, as a higher credit score can help you secure a lower interest rate that saves you money.
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Allison Martin is a Certified Financial Education Instructor (CFEI), syndicated financial writer, and author. Her work has been featured in The Wall Street Journal, ABC, MSN Money, Yahoo! Finance, Fox Business, Credit.com, MoneyTalksNews, Investopedia, The Simple Dollar, and a host of other reputable publications. She also teaches the essentials of personal finance through seminars and workshops.