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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?

    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%.

  • 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 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
    • 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%
  • 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.

  • Down Payment Required By Mortgage Program
  • FHA Mortgage
    • 3.5% down payment
    VA Home Loan
    • No down payment required
    USDA Home Loan
    • No down payment required
    HUD Section 184 Mortgage
    • 2.25% for mortgage amounts over $50,000
    • 1.25% for mortgage amounts below $50,000
    Conventional 97% LTV Ratio Mortgage
    • 3% down payment
    HomeReady Mortgage
    • 3% down payment
    Home Possible Mortgage
    • 3% down payment
    NACA Mortgage Program
    • No down payment required
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  • The Cost of Making a Lower Down Payment
  • 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%.

  • Sources of Funds for Your Down Payment
  • 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.

  • 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 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.

  • Using a Down Payment Assistance Program
  • 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.

  • 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.  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.

  • Rate Details*
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    Points  More Info:
    Points: Fees you are willing to pay in order to get a lower interest rate. The number of points refers to the percentage of the loan amount that you would pay. For example, "2 points" means a charge of 2% of the loan amount.
     
    Total Lender Fees:  
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    Monthly Housing Payments
    P & I More Info
    Principal & Interest: A periodic payment, usually paid monthly, that includes the interest charges for the period plus an amount applied to the reduction of the principal balance.
    Mortgage Insurance More Info
    Mortgage Insurance: The monthly cost for a policy that protects the lender in case you’re unable to repay the full amount of the loan. It is typically required for loans that have a loan-to-value ratio between 80% to 100%.
    (Estimated)
    Property Tax More Info
    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 ...
    (Estimated)
    Homeowner Insurance More Info
    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 ...
    (Estimated)
    Homeowner Association Fee More Info
    Homeowner Association fee: (HOA) fees are funds that are collected from homeowners in a condominium complex to obtain the income needed to pay (typically) for master insurance, exterior and interior (as appropriate) maintenance, landscaping, water, sewer, and garbage costs.
    (If Any)
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    Points More Info
    Points Fees you are willing to pay in order to get a lower interest rate. The number of points refers to the percentage of the loan amount that you would pay. For example, "2 points" means a charge of 2% of the loan amount.
    Origination Fee More Info
    Origination Charge: A loan origination charge is a fee charged by the lender for evaluating, processing, and closing the loan.
    Credit Report Fee More Info
    Credit Report Fee: Fee charged to obtain an applicant’s credit history prepared by one or all of the three major credit bureaus. Used by lender to determine the borrower’s creditworthiness.
    Tax Service Fee More Info
    Tax Service Fee: A fee charged by the lender to cover the cost of retaining a tax service agency. These agencies monitor the property tax payments on the property and report the results to the lender.
    Processing Fee More Info
    Processing Fee: A processing fee is a charge by the lender for clerical items associated with the loan. Examples of processing include loan set up, organization of loan conditions for underwriting, and preparing required disclosures for the borrower.
    Underwriting Fee More Info
    Underwriting Fee: A fee charged by the lender to verify information on the loan application, authenticate the property’s value, and perform a risk analysis on the overall loan package.
    Wire Transfer Fee More Info
    Wire Transfer Fee: In most cases lenders wire funds to escrow companies to fund a loan. Commercial banks that perform this function will charge the lender so the fee is generally passed on to the borrower.
    (If Any)
    FHA Upfront Premium More Info
    FHA Upfront Premium: A fee paid in cash at the close of escrow or more commonly it is financed into the loan. These premiums are pooled together by the FHA and are used to insure the risk of borrower default on FHA loans. FHA upfront premiums are prorated over a five year period, meaning should the homeowner refinance or sell during the first five years of the loan, they are entitled to a partial refund of the FHA upfront premium paid at loan inception.
    (If any)
    VA funding Fee (If any)
    Flood Fee
    Other Fees More Info

    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.

    Total Lender Fees
    *Actual rates and other information may vary. Sponsored results shown only include participating lenders. The information you enter on this page will only be shared with lenders you choose to contact, either by calling the phone number or requesting a quote.
    Current Mortgage Rates as of December 11, 2018
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    Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. The actual payment obligation will be greater if taxes and insurance are included. Click here for more information on rates and product details.
  • Sources

    Down Payment Gifts: https://www.fanniemae.com/content/guide/selling/b3/4.3/04.html

    Conventional Mortgage Down Payment: https://www.fanniemae.com/content/eligibility_information/eligibility-matrix.pdf

    VA Home Loan Down Payment: https://benefits.va.gov/WARMS/docs/admin26/handbook/ChapterLendersHanbookChapter3.pdf

    FHA Mortgage Down Payment: https://www.hud.gov/buying/loans

    USDA Home Loan Down Payment: https://www.rd.usda.gov/files/fact-sheet/RD-FactSheet-RHS-SFHGLP.pdf

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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