If you have been told you need 20% down to buy a home, you are not alone. It is one of the most common beliefs in real estate, and it keeps a lot of would-be buyers renting longer than they need to. In reality, many people buy with much less, and some eligible buyers put down nothing at all. Here is how down payments work and how to decide what is typical for you.
A down payment is the portion of the purchase price you pay upfront in cash. The rest is covered by your mortgage. If you buy a home and put 5% down, your loan covers the other 95%.
From a lender’s point of view, your down payment shows commitment and gives you a stake in the property. It also reduces the lender’s risk, which is why smaller down payments often come with mortgage insurance.
Twenty percent is the point at which a conventional loan no longer requires private mortgage insurance. It also means a smaller loan, a lower monthly payment and less interest over time. Those are real advantages, but they are not requirements. For many buyers, waiting years to reach 20% is not the best tradeoff.
Eligible buyers may put down as little as 3%. With less than 20% down, you will typically pay PMI, which can be removed once you reach 80% loan-to-value. Learn more about conventional loans.
FHA loans allow 3.5% down with a credit score of 580 or higher. They include a 1.75% upfront mortgage insurance premium and annual premiums paid monthly.
Eligible veterans, service members and certain surviving spouses with full entitlement can buy with $0 down. There is no monthly mortgage insurance, though most borrowers pay a funding fee.
USDA loans also offer zero down for eligible buyers in qualifying rural and suburban areas, subject to income limits.
The typical down payment varies a lot from one buyer to the next. First-time buyers often put down less, since they are starting from savings alone. Repeat buyers frequently put down more because they can use equity from the home they are selling. Other factors include:
Most buyers combine a few sources. Common ones include dedicated savings, proceeds from selling a current home, gifts from relatives and, in some cases, assistance programs offered by state or local agencies. Whatever the source, lenders need to document it, so keep records and avoid large unexplained deposits in the months before you apply.
Your down payment is only part of the cash you will need. Plan for closing costs and prepaid items too. In some cases, sellers can contribute toward these costs, within program limits.
Instead of chasing an average, focus on the down payment that fits your budget and goals. Try a few scenarios with our mortgage calculator and explore our low down payment options.
Want to see how different down payments would affect your loan? Reach out to FLO Mortgage and a loan officer will lay out your options side by side.
A FLO Mortgage loan officer can walk through your options, run real numbers and help you choose a loan that fits.
This article is for general education and is not a commitment to lend. All loans are subject to credit approval, underwriting guidelines and program availability. FLO Mortgage, Company NMLS #1835856. Equal Housing Opportunity.
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