How much do you really need to put down on a home?
Despite conventional wisdom, a 20% down payment really isn't required to buy a home. Find out how much you actually need to save.
Buying a home is often one of the most expensive endeavors most people will take throughout their life, so it’s not surprising that saving for a down payment remains a major hurdle for many Americans on their path to homeownership. But although a 20% down payment is considered ideal, it’s not actually as common as you might think — nor is it necessary for buying a home.
Typically, you have to put 3-20% of your home’s sale price down in cash to qualify for a conventional loan (30-year fixed mortgage), but there are exceptions. If you meet eligibility guidelines, you might qualify for a home loan with a zero down payment through Veterans Affairs (VA loans) or the Department of Agriculture (USDA loans) programs.
What is a down payment?
A down payment is the amount of money you spend upfront to purchase a home. It's typically combined with a home loan to fulfill the total purchase price of a home. In addition your down payment amount, your credit score, credit history, total debt, and annual income will influence the loan amount you can qualify for.
A great tool to see how much you can afford based on your down payment and annual income is an affordability calculator. These can take into account your monthly debts, the interest rate on your debt, your loan term, and other relevant factors to help you estimate how much you can afford to spend.
Why 20% is considered ideal
If you're able to come up with a 20% down payment, you’ll reap quite a few benefits. Putting the larger amount down lets you avoid paying private mortgage insurance (PMI) on conventional loans, it can help you qualify for a lower interest rate (which might help you save thousands over the life of your loan), it’ll give you more equity faster, and it will result in a smaller monthly mortgage payment.
Depending on where you’re looking to buy a home, a larger down payment might also help you be a competitive buyer and stand out to the seller if there are multiple offers on the home.
Although 20% isn’t a prerequisite to homeownership, many buyers do put that amount down — and then some. This is often because of tighter real estate markets and the need to present a more competitive offer to a seller in order to win the home.
Saving for a down payment is tough
Just because some buyers are able to put more than 20% down doesn’t mean they don’t struggle coming up with the money.
Some buyers have found luck using more creative ways to fund their down payment by receiving gifts from family members, selling stocks or other investments, using retirement funds, or using leftover money from the sale of a previous home.
Because repeat buyers can often put some of the money from their previous home sale towards their down payment, they’re more likely than first-time buyers to put down larger lump sums.
Loans with less than 20% down
VA and USDA loans are two government-backed programs that don’t require a down payment at all in most cases. VA loans are exclusively for veterans, active military, and military families. USDA loans are available only for homes in qualified rural areas.
If you don’t meet the criteria for these zero down loan programs, there are other programs that offer low down payments that may work for you.
One of the most popular of the low-down payment loans is an FHA loan, which allows for a 3.5% down payment. And there are conventional loan programs from Fannie Mae — Conventional 97 and HomeReady mortgages — that allow for a minimum down payment of just 3%.