What Is a Down Payment — And What Should Yours Be?

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When you start a mortgage application, you have to tell the lender what size down payment you want to make. If you don’t know what a down payment is, much less how it affects your overall home loan, that conversation is going to be pretty confusing. 

So before you get to that step in the process, you should understand how a down payment works and get an idea of what amount of money would be reasonable to put down.

Read on to learn what a down payment is, the minimum down payment you can make on different types of home loans, and important factors to consider as you decide on your down payment size.

What is a down payment?

When you buy a home, the down payment is the portion of the home's price that you pay upfront. 

For example, if you buy a home for $200,000 and you make a 10% down payment, your down payment is $200,000 x 10%, or $20,000. The price minus the down payment is the part of the home's cost that you have to finance. In this example, you're taking out a mortgage for the remaining $200,000 - $20,000, or $180,000. 

The more money you put down, the less you have to borrow from the lender. Lenders like it when people make big down payments because this lowers their risk of you failing to pay them back the full amount.

Typically, you pay the down payment along with closing costs when you close on the mortgage and home purchase. Lenders usually require you to make this payment with a cashier's check or wire transfer so that there's no question whether the funds will go through.

What's the minimum down payment you can make?

The minimum down payment that's possible depends on the type of home loan you're taking out.

Conforming loans

You need a down payment of at least 3% to get a loan that conforms to the guidelines set by the Federal Housing Finance Agency for mortgages that can be bought by Fannie Mae and Freddie Mac. A down payment that low is only an option for a fixed-rate home loan with a term that's no longer than 30 years. On other conforming loans, you'll be required to put at least 5% down.

Non-conforming conventional loans 

The requirements for these loans are up to the lenders, so a lender could in theory offer you a loan with a down payment as low as 0%. However, it's far more likely that lenders will ask you to put some money down. In particular, if you're shopping for a jumbo loan, you'll probably need a down payment of at least 20% to get approved.

FHA loans

If your credit score is 500 to 579, you'll need to make a down payment of at least 10%. If your credit score is 580 or higher, your down payment could be just 3.5%.

USDA loans

For mortgages offered by private lenders and guaranteed by the USDA, no down payment is needed. You generally don't have to put money down for a direct loan from the USDA either, but if you have money saved up you might be asked to use some of it for a down payment.

VA loans

You can put 0% down on a VA-backed purchase loan as long as you aren't buying the home for more than its appraised value. And you generally don't need to make a down payment if you get a Native American Direct Loan from the VA.

Is there a maximum down payment?

There's no upper limit to a down payment, other than the price you're paying for your new home. If you have the means, you can pay up to 100% of a home's price upfront. (If you pay exactly 100%, you're not taking out a mortgage but are paying the entire cost of the home yourself. This is called paying in cash.)

Be aware, though, that lenders have to check where your down payment is coming from. If you're offering to make a very large down payment, don't be surprised if your lender asks a lot of questions about how you got that money and requires additional documentation proving that it's yours to spend.

What's a good size for a down payment?

The standard advice is that you should make a down payment of 20% or more. This isn't a hard-and-fast rule, and most people put less money down, but regulators and lenders view loans with down payments of at least 20% as safer bets. You'll likely be offered a better interest rate if you can make a down payment of this size, and lenders might be willing to offer you a larger loan than you'd otherwise qualify for.

If you have a conventional loan and make a down payment of 20% or above, you aren't usually charged mortgage insurance. The purpose of mortgage insurance is solely to protect your lender, and it doesn't offer you any benefits — it just adds to your costs. So it's great if you're able to skip this expense.

Is a bigger down payment always better?

There are several advantages to making a large down payment, if you can swing it. First, you start out closer to having full equity in your home. For many people, a home is one of their most important assets and a big contributor to their net worth, so it's nice to make some immediate progress toward owning it outright.

Also, you don't have to borrow as much when you make a bigger down payment. That means you can take out a smaller loan. And a smaller loan amount translates into lower monthly payments, which are easier on your budget and might free up money to spend on other things down the line.

Lenders might be willing to offer you a lower interest rate if you make a sizable down payment because putting a lot of money down reduces their risk. And you'll usually end up paying less interest in total with a larger down payment because you're being charged interest on a smaller loan principal.

Finally, making a significant down payment lowers the odds that your mortgage could go underwater, meaning that you owe more than the home's value. An underwater mortgage can result in being unable to sell your home until you rectify the situation, and it makes it more likely that you'll default on your loan. Putting a larger amount down is an important protection against those bad outcomes.

When it doesn't make sense to put a lot of money down

Since there are so many points in favor of making a big down payment, does that mean you should always scrape together every penny you've got to ensure your down payment is as large as possible?

The answer is a resounding no. While a bigger down payment is better than a smaller one in many ways, you need to look at your financial circumstances as a whole before deciding what size down payment you can afford.

Keep in mind that you'll need enough cash to cover closing costs, to pay movers or to rent a moving van, and to pay for any minor repairs you realize you have to make after you move into your new place. If you're buying a fixer-upper, you might need money for major repairs, too.

You should also leave yourself some money for an emergency fund of at least three months' expenses. If something unexpected happens, like if your car breaks down or you get a surprise medical bill, you want to have enough cash on hand to take care of it, along with any of the other hidden costs of home buying

And if you're working toward other long-term goals, like saving for retirement or paying off credit cards, you have to weigh the pros and cons of using more of your money for a down payment. In some cases, focusing on a down payment might not be worth it if it's going to set your progress back in another area.

Another thing to consider is that saving up for a larger down payment takes time. If there's a reason you need to buy a home sooner rather than later — like if your family is growing and you're running out of space in an apartment — it might be wiser to move forward with a smaller down payment rather than sacrifice your well-being by sticking it out in your current living quarters.

How can you get help with making a down payment?

If you don't have enough savings to make a down payment, you might benefit from a down payment assistance program. These programs are offered by state and local governments, or sometimes by nonprofits, and they're usually aimed at first-time homebuyers with low income. Assistance may come in the form of a grant, a low-interest loan, or a loan that's forgiven after a certain period of time. A Department of Housing and Urban Development-approved counselor can give you information about available programs and help you figure out if you might qualify for them.

There's no single down payment recommendation that will work for everyone. For some people, the perfect down payment may be 20%, but for others any required down payment might keep homeownership out of reach. 

Whatever your circumstances, it's a good idea to think about how much you can realistically save before deciding on a down payment amount. And if you find yourself struggling to reach your goal, be sure to look into types of home loans that don't require money down or that allow for low down payments.

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