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What Size Down Payment Do I Need to Buy a Home?

What Size Down Payment Do I Need to Buy a Home?

  • Down Payment Overview
  • The down payment is money that you contribute when you purchase the home that you do not get back until you sell the home.  So if something unfortunate happens such as selling your home for less than you paid for it or your home going into foreclosure, then you could lose part or all of your down payment.  The down payment you can afford plus the mortgage you can afford equals the price home you can afford.

    Borrowers frequently ask what size down payment they need to buy a home as saving money for a down payment can be challenging.  There is no set rule for how much you need to put down to buy a home but there are some guidelines and financial considerations you should be familiar with.  In order to receive the lowest mortgage rate, most lenders require that borrowers make a down payment of at least 20% of the property purchase price.

    Lenders have guidelines that specify an acceptable loan-to-value ratio (LTV), or the amount of money they are willing to lend you compared to the value of the house.   Lenders typically expect an LTV ratio of 80% or less, which means you are contributing a down payment equal to 20% or more of the purchase price of the home.  For example, if you are buying a home for $100,000, if you want to receive the best interest rate, your down payment would be at least $20,000 and you would borrower the remaining $80,000 from the lender.  In this example, the loan-to-value ratio is 80% ($80,000 mortgage ÷ $100,000 property value = .80 = 80%).  You also need to take into account mortgage closing costs in determining how much money is required up-front to purchase a home and closing costs can run thousands of dollars.

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    What Size Down Payment Do I Need to Buy a Home? Instructional Video

  • Lenders typically require that the funds used for a down payment are "seasoned" in your bank, investment or brokerage account for at least two months prior to applying for a mortgage.  To verify the source of funds used for your down payment, lenders usually require that borrowers require two months of bank, investment or brokerage account statements.  Lenders want to make sure that the funds used for a down payment are from legitimate sources, truly belong to borrower and are not a loan that the borrower is required to pay back.   

  • Example: What Size Down Payment Do I Need to Buy a Home?
  • The example below shows the down payment required to purchase a $475,000 house with a 20% down payment, which implies a Loan-to-Value (LTV) ratio of 80%.  This example also shows the estimated non-recurring and recurring closing costs paid for by the borrower.  The example provides a summary estimate for total mortgage closing costs. This figure is an estimate as closing costs vary by lender, mortgage program and geography.  The down payment plus the estimated closing costs equals the total amount of money required by the borrower upfront to purchase the property. 

    This example also shows the recommended minimum amount of savings the borrower should keep in reserve for this mortgage ($9,200 in this case, which represents four months of total monthly housing expense).

  • 20% Down Payment Example
    • Home Purchase Price
    • $475,000
    • Down Payment
    • $95,000
    • Mortgage Amount
    • $380,000
    • Loan-to-Value (LTV) ratio
    • 80%
    • Estimated Closing Costs
    • $8,000
    • Total Up-Front Money Required
    • $103,000 (down payment ($95,000) + estimated closing costs ($8,000))
    • Estimated Monthly Housing Expense
    • $2,300
    • Recommended Minimum Savings in Reserve
    • $9,200 (four months of monthly housing expense)
  • Buying a Home with a Down Payment of Less than 20%
  • So 20% is the standard down payment amount when buying a home but it is certainly possible to buy a home with a smaller down payment.  If you put down less than 20%, the lender  will likely charge a higher interest rate or require the borrower to purchase private mortgage insurance (PMI), which increases your mortgage costs.  PMI typically requires that the borrower pay an ongoing monthly fee along with your mortgage payment.  PMI rates vary but can be approximately 0.375% of the mortgage amount for a 30 year loan with a loan-to-value ratio of 90% (so when the borrower makes a down payment of 10%).  The borrower can request to have the PMI fee removed after your LTV reaches 80% or less (the amount of your mortgage falls below 80% of the value of your house).

    Instead of charging PMI, some lenders may charge a higher interest rate -- this is often referred to as lender paid PMI. So the lender may offer you an interest rate of 4.0% if you make a down payment of 20% and an interest rate of 4.5% if you make a down payment of 10%.   In many cases paying a higher interest rate by selecting lender paid PMI can cost more than borrower paid PMI because the borrower pays the higher interest rate over the life of the mortgage unless they are able to refinance. Unlike borrower paid PMI, lender paid PMI cannot be removed when your LTV falls below a certain threshold.

  • Great Mortgage Idea If you decide to make a down payment of less than 20% and the lender does not require that you pay PMI, be sure to ask the lender if lender paid PMI is included in the interest rate, and if the answer is yes, ask what the interest rate would be if you, the borrower, paid PMI separately as this could save you a significant amount of money over the life of your mortgage.
  • There are also multiple low or no down payment mortgage programs such as those offered by the VA and FHA that allow you to buy a home with a down payment of less than 20% and in the case of the VA program require no down payment.  The FHA program allows the borrower to buy a home with a down payment as low as 3.5% of the property purchase price but requires the borrower to pay an up-front and ongoing annual mortgage insurance premium which are additional costs on top other closing costs and your monthly mortgage payment. The VA program requires the borrower to pay a one-time, up-front VA funding fee in addition to other mortgage closing costs.

    So you can certainly buy a home with less than 20% down but it is going to cost you more in fees or increased interest rate.  When determining the size of down payment that is right for you, always remember to keep enough savings in reserve to cover four-to-six months of monthly housing expense. This will allow you to absorb any unexpected changes in your financial situation.

  • Using a Gift for Your Down Payment
  • You can also use a gift from a relative, fiance or domestic partner to pay for all or part of the down payment, closing costs or financial reserves when buying a home.  There are typically certain rules and procedures that the lender requires you to follow when you use a gift to pay for your down payment.  The individual providing the gift is usually required to provide a gift letter to demonstrate proof of the gift, confirm that funds being provided are not borrowed and also verify that the borrower is not required to repay the gift. 

    Lenders may also request two months of bank statements from the individual providing the gift to verify the source of funds being used for the gift. Lenders request bank statements from the individual providing the gift to comply with regulations and to ensure that the funds come from a legitimate source. If the funds being used for the down payment gift do not appear on both monthly bank statements and a large deposit appears on one of the statements then the lender may require that the gift provider provide a letter that explains the source of the funds.

    One possible way to avoid the gift provider being required to provide a gift letter or bank statements is to make sure the money being used for the down payment is "seasoned" which means the funds have been in the borrower's bank account for at least two months.  In this scenario, the borrower receives the down payment gift funds at least two months prior to applying for the mortgage.  When the lender reviews the borrower's bank statements for the prior two months, the funds for the down payment appear on both statements which usually eliminates the need for a gift letter or other documentation from the gift provider.

    It is important to highlight that the borrower is still typically required to pay PMI or a higher interest rate if the the down payment is less than 20% of the purchase price of the property, regardless of if the buyer contributes the down payment fully out of his or her own funds or if all or part of the down payment is provided as a gift. Additionally, the buyer will typically receive the best terms (lowest interest rate) from the lender if he or she makes a down payment of at least 20% of the property purchase price even if all or part of the down payment is provided to the borrower as a gift from a relative, fiance or domestic partner.

  • Using Money in Your Retirement Account for Your Down Payment
  • You can withdraw $10,000 from a qualified retirement account penalty-free for the down payment on your first home.  You are usually charged a ~10% penalty if you withdraw funds from a retirement account before the age of 59 1/2 so eliminating the early withdrawal penalty is a nice break for home buyers.  If your spouse is also a first-time home buyer you can take out another $10,000 penalty-free, for a total of $20,000.  In addition to paying for your down payment, the money you withdraw from your retirement account can be also be used to pay for home construction costs or mortgage closing costs.

  • Great Mortgage IdeaAccording to guidelines, a first-time home buyer is anyone who has not owned their primary residence within the past two years. So even if you have previously owned a home or if you own an investment or vacation property but rent your primary residence you may qualify as a first-time home buyer.
  • Please note that different tax rules apply to different types of retirement accounts. For example, any withdrawal from a traditional IRA is subject to income tax but you can withdraw $10,000 in earnings from a Roth IRA tax-free as long as the account has been open for five years.  First-time home buyers can withdraw $10,000 penalty-free from either type of account but you have to pay income tax on withdrawals from the traditional IRA so it typically more tax-efficient to use funds in a Roth IRA account.  You can also borrow money from your 401(k) for a down payment but that can be complicated depending on your plan's policies.

  • Great Mortgage IdeaFREEandCLEAR recommends that you consult a tax professional to understand potential tax consequences associated with using a gift or funds from a retirement account to pay for a down payment.
  • Should I Save for My Down Payment or Pay Off My Debt?
  • Individuals thinking about buying a home are also typically focused on saving money for their down payment which raises a common question: should I save money for my down payment or pay off debt?  The answer to that question partially depends on the borrower’s income level but it usually makes sense to pay down the debt first because paying off debt, especially if it has a high interest rate, makes it easier for a borrower to save money for a down payment and also improves the borrower's ability to qualify for a mortgage.

    When lenders evaluate a borrower’s ability to qualify for a mortgage they review debt-to-income ratios, or the borrower’s monthly debt expense as compared to the borrower’s income. The less monthly debt a borrower has, the lower the borrower's debt-to-income ratio and the larger the mortgage the borrower can qualify for. Paying down your debt can also improve your credit score which is highly beneficial when you apply for your mortgage.  It is important to note that you do not need to pay off all of your debt and saving for your down payment is also important when buying a home and applying for a mortgage.

  • CalculatorUse our MORTGAGE QUALIFICATION CALCULATOR to understand what size mortgage you qualify for at various levels of monthly debt
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    Property Tax: (Also called "Real Estate Tax.") Property taxes are government assessments on real estate property. With mortgage financing, the local, county or state tax assessment on real estate property is considered part of the monthly housing obligation and typically collected and set aside by the lender ...
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    Homeowner Insurance: or also commonly called hazard insurance, is the type of property insurance that covers private homes. It is an insurance policy that combines various personal insurance protections, which can include losses occurring to one’s home, its contents, loss of its use, or loss of other personal possessions of the homeowner, as well as liability insurance for accidents that may happen at the home or at the hands of the homeowner within the policy territory.lender ...
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    Other fees could be either additional Administrative Fees that a lender charges or it could be a Flat Fee to cover all lender charges such as: (Origination Fees, Points, Underwriting and Processing Fees, Credit Reports and Tax Service Fees)

    The flat fee does not include prepaid items and third party costs such as appraisal fees, recording fees, prepaid interest, property & transfer taxes, homeowners insurance, borrower’s attorney’s fees, private mortgage insurance premiums (if applicable), survey costs, title insurance and related services.

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  • Sources

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About the author

Harry Jensen, Mortgage Expert

Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR. More about Harry


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