You can buy a house with less than 20% down, but other factors determine the exact down payment you need.
Before you start shopping for a home, you need to know what you can afford – and a big part of that depends on how much you can afford as a down payment.
But how much down payment do you need to be able to afford the house you want? The answer isn’t the same for everyone, but key information can help you determine the right amount to save, the mortgage programs to explore and other resources to consider to help you buy the right home.
What’s a Typical Down Payment Amount?
Beyond being able to buy a home with cash, many lenders and consumers view a 20% down payment with a 30-year, fixed-rate mortgage as ideal.
“That’s kind of the gold standard. Whether or not it’s accurate is a different story, but that’s what people see as the gold standard,” says Ralph DiBugnara, president of Home Qualified, a digital resource for consumers and real estate professionals covering the housing market, and vice president at financial services firm Cardinal Financial.
However, the typical U.S. homebuyer is putting far less money on the table at closing. The median down payment is 12%, according to the National Association of Realtors 2021 Home Buyer and Seller Generational Trends report. Broken out into age groups, buyers 22 to 30 years old put down a median of 6% of the loan value, while buyers ages 31 to 40 put 10% down, buyers 41 to 55 put a median of 13% down and buyers 56 to 65 put a median of 18% down. Only seniors, ages 66 and up, provide a median of more than 20% of the loan value as a down payment.
Types of Low Down Payment Mortgage Options
The amount of down payment needed for you to be able to secure financing for a home depends on the type of mortgage you qualify for. Your credit score and history, current income and savings all play a role.
To help you find the right mortgage program to fit your situation, seek out a professional financial expert who can help you explore all options, says Miki Adams, president of CBC Mortgage Agency, a part of the Cedar Band Corp., based in Utah, which provides down payment assistance and loans aimed at underserved markets.
“Our recommendation is (for homebuyers) to find a (U.S. Department of Housing and Urban Development) counseling agency that can work with them one on one,” Adams says. HUD-approved counseling agencies offer free counseling, either in a group or one on one and can be found on HUD’s website.
Here are the mortgage options that can allow for a low down payment:
- Conventional loan. A conventional mortgage is offered by a private lender, often a bank, credit union or non-bank lender, like Quicken Loans. A conventional mortgage that meets criteria from Fannie Mae or Freddie Mac may be purchased from the lender by these government-sponsored entities after the mortgage has been issued, and then sold to investors. Many banks and non-bank lenders offer conventional loans requiring less than 20% down. DiBugnara notes that Fannie Mae and Freddie Mac both have programs requiring just 3.5% down. If you’re putting less than 20% down, however, you will be required to pay mortgage insurance for a conventional loan, which increases your monthly payment.
- FHA loan. A mortgage insured by the Federal Housing Administration often allows for a lower down payment and may be more flexible with credit score requirements than many conventional mortgages. An FHA loan is still issued by a bank or other lender, but it is approved and insured by the FHA. The minimum down payment required for an FHA loan is 3.5%, but mortgage insurance is required. The FHA allows for mortgage insurance at 1.75% of the loan amount to be paid at closing, or for mortgage insurance to be rolled into the loan.
- VA loan. A loan insured by the U.S. Department of Veterans Affairs can help active duty military, veterans and their families purchase a home. With a VA loan you may have the option to have a zero percent down payment. There are limits to the size of the loan if no down payment is provided, and those limits depend on the location of the purchase.
- USDA loan. The U.S. Department of Agriculture also offers a zero percent down mortgage program for properties located in eligible rural areas through its Rural Development Guaranteed Housing Loan Program. In addition to the rural setting, the USDA’s zero-down program is aimed at low-income residents looking to achieve homeownership.
In exploring your options, you may find you qualify for multiple programs. Especially in a housing market where multiple bids are common, keep in mind that the mortgage program you choose gets scrutinized by the seller when you submit an offer.
“Sellers are looking for stronger down payments … but they just want to be sure you can secure financing,” DiBugnara says. Some sellers may view a VA or FHA loan as less desirable than a conventional mortgage because the VA and FHA programs require additional steps for approval. While this doesn’t necessarily make them less likely to be approved, a seller may view them as less appealing than a competing offer with a conventional mortgage.
Private Mortgage Insurance
Private mortgage insurance serves as protection for the lender on the chance that the borrower defaults on his or her loan, and it is only required when the buyer has put less than 20% down. PMI may either be paid up front, at closing or in monthly installments as part of the mortgage payment.
However, DiBugnara notes that adding to the monthly cost can be a slippery slope toward becoming house-poor. “It’s really the mortgage insurance that makes (a home) less affordable,” he says.
To avoid taking on a monthly payment that’s too high, DiBugnara recommends determining the monthly payment you can afford first and setting your budget based on that, even if PMI considerations for a low down payment lowers your budget for a home.
Down Payment Assistance
Even if a down payment as low as 3.5% feels out of reach, know that you have options to help you achieve homeownership without having to save for a decade.
Down payment assistance programs are widespread throughout the U.S. to help provide the one-time funds necessary to afford a down payment. Some down payment assistance programs serve as a second lien on the home, which can be paid back slowly or forgiven after a certain number of years of owning the home. Other programs serve as a grant, giving eligible homeowners money for a down payment with no payback required.
A good place to start looking for assistance you qualify for is with your state government – most states have first-time homebuyer programs that include various forms of down payment assistance to low- or moderate-income residents. There are also organizations like the CBC Mortgage Agency, which operates the Chenoa Fund, providing multiple down payment assistance programs to homebuyers.
A housing counselor, financial advisor or even your real estate agent can help you find a program to help you with your down payment.
Why You Should Save for More Than Your Down Payment
Before you calculate what you’ll need for a down payment based on every cent you have in savings, don’t forget that you’ll also need to cover closing costs and have some financial cushion once you’re a homeowner.
Closing costs vary based on the cost of your home and where it’s located, but often add up to between 3% and 6% of the purchase price, according to Rocket Mortgage. Some down payment assistance programs will also cover closing costs, but that is a detail you should clarify in advance.
After you close on your home, you should have at least a couple thousand dollars in savings to serve as a rainy day fund – in case your air conditioning breaks on the hottest day of the year or you discover a leak in your roof.
While you save up for these additional costs to purchase a home, don’t go overboard to try to reach your goal faster. “Save an amount of money each month that’s within your comfort zone,” Adams says. You may opt to forego takeout meals for the foreseeable future to save more, for example, but eating instant ramen for months on end to drastically cut grocery costs is unnecessary.