How Much Do You Really Need for a Down Payment?

You may need less than you think. Understanding your options can help you decide what makes sense for your finances and your home-buying goals.

By Sandy Biondo | Consolidated Lenders Group

Buying a home often starts with one big question: “How much money do I need for a down payment?”

Many buyers assume the answer is 20%. While putting 20% down can have advantages, you don't necessarily need a 20% down payment to purchase a home.

The amount you may need depends on several factors, including the type of loan, the property, your financial situation, and the lender's requirements. Some loan programs allow qualified borrowers to purchase with a much smaller down payment.

Do You Have to Put 20% Down?

No.

Twenty percent is often discussed because, with a conventional mortgage, putting at least 20% down typically means you won't be required to carry private mortgage insurance, or PMI. But there are conventional and government-backed loan options that may allow qualified borrowers to put considerably less down.

For example, some conventional programs can allow down payments as low as 3%, while FHA financing can allow a minimum down payment of 3.5% for qualified borrowers. Other programs may offer low- or even no-down-payment options to eligible borrowers.

SANDY'S TIP

Don't assume you need to wait until you've saved 20% before talking with a mortgage professional. You may have options you haven't considered.

Is a Bigger Down Payment Better?

It can be - but that doesn't automatically mean putting as much money down as possible is the right decision for everyone.

A larger down payment means you're borrowing less money. Depending on the loan and your circumstances, it may also help reduce your monthly payment, interest rate or other loan costs.

But there is another side to consider.

Putting a large amount of your savings into the home could leave you with less cash available for:

• Closing costs

• Moving expenses

• Repairs or improvements

• Furniture and household expenses

• Unexpected emergencies

• Other financial goals

  
  

That's why the better question isn't always “What's the biggest down payment I can make?”

It may be: “How much should I put down while still feeling financially comfortable after I get the keys?”

The CFPB similarly recommends considering closing costs, moving expenses, repairs and an emergency cushion when deciding how much cash to devote to a home purchase.

What Happens If You Put Less Than 20% Down?

With many conventional mortgages, putting less than 20% down means you may be required to have private mortgage insurance (PMI).

PMI protects the lender—not the borrower—if the borrower stops making payments, and it increases the cost of the mortgage.

That doesn't automatically make a lower-down-payment mortgage a poor choice.

For some buyers, keeping additional savings available or purchasing sooner may be worth comparing against the additional cost of mortgage insurance.

The important thing is to look at the complete picture rather than focusing on one number.

Don't Forget About Closing Costs

Your down payment isn't necessarily all of the money you'll need at closing.

There can also be closing costs and other upfront expenses associated with purchasing a home.

The exact amount varies depending on the transaction and loan.

That's another reason it's helpful to discuss financing before deciding exactly how much of your savings to use for a down payment.

You don't want to focus so heavily on reaching a particular down-payment percentage that you overlook the other expenses associated with buying and owning your new home.

So, How Much Should You Put Down?

There isn't one answer that's right for every buyer.

Your down payment should be considered alongside your:

Savings • Monthly budget • Loan options • Closing costs • Long-term plans

Sometimes putting more down may make sense.

Sometimes preserving more of your savings while choosing an appropriate lower-down-payment option may make more sense.

The goal is to understand the choices available to you and how each one affects the bigger financial picture.

You Don't Have to Figure It Out Alone

If you're thinking about purchasing a home—even if you're not sure you're ready yet - you don't have to determine the down payment or loan program on your own.

Sandy can help you review your situation, understand available financing options, and compare how different down-payment amounts may affect your mortgage.

A conversation now can help you understand what may be possible and what steps to take next.

Every borrower's situation is different. Loan programs, rates, terms, eligibility requirements, mortgage insurance requirements and costs vary. This information is provided for general educational purposes and is not a commitment to lend.