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Down Payments: What They Are, How They Work & How Much to Put Down

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Saving up a down payment to buy a home can seem like an impossible goal, whether you're a first-time home buyer or an experienced borrower. But there are many mortgage loan programs out there that help people get into homeownership, even if they lack access to a large amount of cash.

No-down-payment and low-down-payment mortgages help borrowers buy homes with a small down payment or no down payment at all. As a tradeoff for the low down payment, expect the mortgage lender to look for other ways to make sure you're well qualified for the loan.

What is a down payment?

A down payment is the money you initially contribute toward a purchase, as opposed to the money put in by the lender. For example, a down payment made toward the purchase of a home is the money you pay upfront toward your home.     

How down payments work 

Most of the time, when you buy a home, the amount of your mortgage loan is the difference between your down payment and the purchase price. (It is possible to get a mortgage loan for more than the purchase price, but that's a special -- and risky -- type of loan that we're not talking about here.) 

In the past, a 20% down payment was required, but not anymore. That meant that if your home's purchase price was $150,000, you needed a down payment of at least $30,000. Clearly, a 20% down payment would be a hurdle for many people, even on a modestly priced home.

The down payment affects the loan in different ways. For one thing, a larger down payment means you have a better shot at getting the lowest possible mortgage interest rate. That's because the more equity you hold (the less you owe) the less risky you are as a borrower. 

Also, if you make a down payment of at least 20%, you can avoid paying for mortgage insurance. Mortgage insurance protects the lender in case you default on your loan. It is usually required when your equity is less than 20%. 

Mortgage insurance goes by different names. On conventional loans, it's called private mortgage insurance or PMI. On an FHA loan, it's called MIP, which stands for mortgage insurance premium. On a conventional loan, you can get rid of PMI: The insurance requirement is automatically canceled once your equity reaches 22%. But the insurance on an FHA loan is required for the entire term. In that case, you'll need to refinance the loan (with at least 20% equity) to remove this additional cost. 

One last thing you should understand is you'll have a hard time getting a mortgage with absolutely no cash in hand. Most mortgage lenders require you to have at least one month's housing payment, and sometimes more, in the bank. In some cases, you might also need cash to cover closing costs other than the down payment. A loan officer will explain the requirements to close on your particular home loan. 

How much should you put down on a house?

If you're not sure how much you should pay as a down payment, use our mortgage calculator to play around with the down payment size and credit score to figure out which loan option works best for your situation.

Putting more money down will lower the monthly payment and could also lower the interest rate and other costs. Another factor in your down payment decision should be your own need for access to cash. You might want to keep money aside to cover moving expenses, remodeling, or furniture. If you don't have cash, you might need to finance home renovations or other costs -- adding to your debt.

A third consideration is your timeline. A lower down payment takes less time to save, so it could get you into homeownership sooner. For some borrowers, that's worth the extra cost.

If you have well-off relatives, they can contribute to your down payment through a down payment gift. There are some rules around how much of your down payment can come from a gift, and who can give a down payment gift. These regulations are different for each loan type. If you're planning to use a gift for part of your down payment, make sure to do some research before applying for a home loan.

Minimum down payment requirements

Down payment requirements vary with loans and lenders. According to the National Association of Realtors (NAR) most home buyers make a down payment of less than 20%, and the median down payment size is 12%. Here's a look at the minimum down payment requirements for a few different types of loans.

FHA loan: 3.5% down

An FHA mortgage is insured by the Federal Housing Administration. Most mortgage lenders participate in the FHA loan program. To qualify for an FHA loan with 3.5% down, you need a credit score of at least 580. If your credit score is lower, but above 500, you might qualify if you can make a 10% down payment. 

In most states, FHA purchase loans require an upfront mortgage insurance premium equal to 1.75% of the loan amount, and annual mortgage insurance of up to 1.05% of the balance owed.

VA loan: 0% down

The VA mortgage is a home loan insured by the Department of Veterans Affairs. This loan is for eligible service members, veterans, current and former National Guard and Reserve members, and some spouses. 

If you qualify for a VA loan, you don't have to make a down payment at all. VA loans don't require mortgage insurance, but most borrowers pay a funding fee of up to 3.6% of the loan amount.

USDA loan: 0% down

The USDA mortgage is a home loan insured by the U.S. Department of Agriculture. To qualify for a USDA loan, which does not require any down payment at all, you'll need to meet special qualification criteria. You must be a low-income or moderate-income household (the limits depend on the area in which you live), the home must be in a qualifying location (usually rural), and the home must serve as your primary residence. 

USDA loans don't have mortgage insurance but they do have an upfront loan guarantee fee of up to 3.5% and an annual fee of up to 0.5%. 

Conventional loan: 3% down

Many lenders offer a low down payment conventional mortgage that is not backed by the federal government. For example, many major lenders participate in the Freddie Mac Home Possible® mortgage program, the Fannie Mae HomeReady mortgage program, or the Fannie Mae Conventional 97 mortgage loan program. All three are conventional loans that require a down payment of as little as 3%. 

Some lenders also create their own special low down payment mortgage programs for qualified applicants. 

Low down payment mortgage loans

Teachers, firefighters, law enforcement officers, and emergency medical technicians can buy a home with $100 down through the Good Neighbor Next Door Program. The home must be in a designated HUD revitalization area and be listed on HUD's website. The sale price is 50% of the appraised value. If more than one borrower applies to buy a home, the buyer is chosen by a random draw.

Some lenders offer zero down or low down payment mortgages to practicing doctors, dentists, residents, interns, and fellows. Doctor loans are for medical professionals who are new to their job but have high earning potential.

Even if you don't qualify for a 0% down home loan, you might be able to take advantage of grants and special programs designed to help people buy homes. These programs are usually local and typically come with income limitations. The down payment assistance can take the form of a non-repayable grant, or a low-interest, deferred-payment second mortgage. The U.S. Department of Housing and Urban Development is a great resource for information. 

You are the only one who can decide what's most important to you. A smaller down payment can get you into a home so you can start building equity, and could free up some of your cash for moving expenses or renovations. A bigger down payment can save you money on interest, mortgage insurance, and possibly other costs. Make sure you weigh your options to find the right one for you.

Need a low down payment mortgage loan? Check out The Ascent's NASB Mortgage Review. NASB offers mortgages for all types of buyers.

Still have questions?

Here are some other questions we've answered:

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If you're a first-time home buyer, our experts have combed through the top lenders to find the ones that work best for those who are buying their first home. Some of these lenders we've even used ourselves!

FAQs

  • The down payment lowers the amount you need to borrow to buy a home. It can serve other purposes, too. The size of your down payment can affect the interest rate you pay and other loan costs.

  • Weigh your available cash against your desire to get into homeownership on a particular timeline. A lower down payment on a mortgage will likely leave you with a more expensive loan. But don't give up on homeownership for that reason alone. A lower down payment could get you into a home sooner, so you can start building equity.

  • The down payment on a house is the amount of money you contribute to the purchase. The rest is contributed by the lender in the form of a loan.

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