The down payment is money that you contribute when you purchase the home, with the remainder of the purchase price coming from your mortgage. Your down payment also represents your homeowners equity immediately after your home purchase closes. Borrowers frequently ask what size down payment they need to buy a home as saving money for a down payment can be challenging. The short answer to this question is that there is no short answer. The down payment you are required to make depends on the lender, mortgage program and several other factors.
If you are looking to obtain the best loan terms including the lowest mortgage rate and closing costs, most lenders require you to make a down payment of at least 20% although that figure may be as low as 10% for certain lenders. If you want to avoid paying private mortgage insurance (PMI), which is an extra monthly cost, then you usually need to put down at least 20% of the purchase price.
Your required down payment is directly related to the maximum loan-to-value (LTV) ratio used by the lender and mortgage program you choose. Lenders have guidelines that specify how much money they are willing to lend you compared to the value of the property. The LTV ratio effectively caps your loan amount which means you need to come up with the remaining funds to buy the home, which is your down payment.
For example, if the maximum LTV ratio for your lender and loan program is 80% and you want to buy a home for $100,000, then you are required to make a down payment of $20,000, or 20% of the purchase price, and obtain a mortgage for $80,000 for the remaining 80% of the purchase price. If the maximum LTV ratio is 95% instead of 80%, then you are required to make a down payment of only $5,000, or 5%. With certain mortgage programs you are not required to make any down payment, which means your LTV ratio is 100%.
The example below shows the down payment required to purchase a $475,000 house with a 20% down payment, which implies an LTV ratio of 80%. The example outlines estimated mortgage closing costs, which typically run 1.0% to 2.0% of the purchase price. The down payment ($95,000) plus estimated closing costs ($8,000) equals the total amount of money required ($103,000) upfront to purchase the property. The example also shows the recommended savings you should keep in reserve at closing -- $9,200, which represents four months of total monthly housing expense -- although many lenders and mortgage programs do not require that you hold reserves. This example is based on a specific property purchase price and LTV ratio. Applying a higher LTV ratio or buying a less expensive home reduces the down payment you are required to make.
20% Down Payment Example
While making a down payment of at least 20% offers several advantages, it is certainly possible to buy a home with a lower down payment or no money down at all -- you just need to find the right mortgage program. As outlined in the table below, there are a range of no or low down payment programs available to qualified applicants. The specific down payment you are required to make depends on the program you choose and in some cases other borrower qualification factors including your credit score. Review the information presented in the table and then click on a program title to learn more.
Use the FREEandCLEAR Lender Directory to search for 25 mortgage programs including many no or low down payment programs.
Please note that most no or low down payment programs require you to pay an upfront and/or ongoing mortgage insurance fee, which are extra costs. For conventional loans, the mortgage insurance is cancellable after your LTV ratio reaches 80% or less, which means your loan balance falls below 80% of your property value. Ongoing mortgage insurance for government-backed loans including the FHA and USDA programs is not cancellable which means you are required to pay the monthly fees for the entirety of your loan. The VA home loan program only requires a one-time funding fee at closing while the NACA program does not required mortgage insurance. We advise you to check with your lender to understand any extra costs associated with a low down payment mortgage program.
Additionally, most no or low down payment programs apply loan limits that cap the mortgage amount you are eligible for. If you live in a more expensive area, the loan limits may restrict the properties that you can afford to buy. If you want to qualify for a larger loan that exceeds the loan limits, also known as a jumbo mortgage, you are usually required to make a down payment of 10% to 20%.
There are several sources of funds you can use for your down payment. The most common source of funds is your personal savings or other assets such as investments that you sell to pay for your down payment. 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, lenders usually require that you provide two months of bank, investment or brokerage account statements. Lenders want to make sure that the funds are from legitimate sources, truly belong to you and are not a loan that you are required to pay back.
If you plan to use your own funds for a down payment you may ask yourself should I save money for my down payment or pay off debt? The answer to this question partially depends on your income level but it usually makes sense to pay down the debt first because in the long run, reducing your debt expense makes it easier for you to save for a down payment. Paying down your debt can also improve your credit score which is beneficial when you apply for your mortgage. Ultimately you must balance reducing your debt and saving for your down payment but with the right approach you can accomplish both.
In addition to using your own funds, there are several other options to pay for your down payment include using a gift from a friend or relative, a down payment assistance program or using funds from your retirement account. We review each of these funding alternatives below.
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 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 you typically receive the best loan terms from your lender if you put down at least 20% of the purchase price even if all or part of the down payment is provided to you as a gift from a relative, fiance or domestic partner.
You can use a down payment assistance program to pay for all or part of your down payment. Down payment assistance programs can be structured several ways including as a grant or a subordinated silent second loan. You are typically not required to repay down payment assistance grants as long as you own your home for a specified period of time. With a silent second program, your monthly loan payments are deferred until you sell your home or refinance your mortgage at which point you are required to repay the loan in full, including deferred interest. Down payment assistance programs can range from thousands of dollars to up to 20% of the property purchase price, depending on the program. Most programs apply borrower income limits and other eligibility requirements.
Down payment assistance programs are usually provided by HUD-approved state or local housing commissions or agencies. Some larger companies also provide home buyer assistance programs for their employees. Assistance programs can be combined with low down payment mortgage programs to enable you to buy a home with minimal personal financial contribution. We recommend that you work with a HUD-approved organization or your employer to learn more about the down payment assistance programs that are available to you.
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. According to mortgage 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. We always recommend 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.
Down payment requirements vary by lender and mortgage program. We recommend that you contact multiple lenders in the table below to learn about their qualification guidelines and the programs they offer. Shopping multiple lenders and comparing loan proposals is also the best way to save money on your mortgage.
"B3-4.3-04, Personal Gifts." Selling Guide: Fannie Mae Single Family. Fannie Mae, September 29 2015. Web.
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"Chapter 3.3.b Maximum Loan, downpayment." Lenders Handbook - VA Pamphlet 26-7. U.S. Department of Veterans Affairs, 2020. Web.
"II.A.2.c. c. Required Investment." FHA Single Family Housing Policy Handbook 4000.1. Federal Housing Administration, January 2 2020. Web.
"Single Family Housing Guaranteed Loan Program." USDA Rural Development. U.S. Department of Agriculture, 2020. Web.About the author