How Much Should You Put Down on a House?

Deciding how much to put down on a house requires balancing liquid cash with other priorities, but economic conditions related to COVID-19 and a hot housing market have added a twist.

To respond to the economic uncertainties of the pandemic, some lenders changed their underwriting policies, making it more difficult for borrowers with lower credit scores to get approved. Also, due to the nationwide seller’s market, offering a large down payment could make it easier to win a bidding war because it improves your odds of getting approved for a loan.

So, how much should you put down on a house? Here are some things to consider.

[Read: Best Mortgage Lenders.]

How Much Down Payment Is Typically Required When Buying a House?

If you’re wondering what percentage you should put down on a house, 20% down is the rule of thumb, but there is no one-size-fits-all figure. For example, some loan programs require a down payment as little as 3% or 5%, and some don’t require a down payment at all.

The primary reason to consider a 20% down payment is that if you have a conventional loan, that’s what you need in order to avoid private mortgage insurance. However, according to the Realtors Confidence Index by the National Association of Realtors, 72% of homebuyers put down less than 20% on their mortgage loans.

What’s a Good Down Payment for a House?

There’s no right amount to put down on a home, but there are some guidelines to consider. What you put down depends on your monthly housing budget, your loan program, your cash in reserve, your plans for the home and the market’s current conditions.

The larger your down payment, the lower your monthly mortgage payment. While 20% is a good rule of thumb if you can afford it, there are opportunities for lower down payments — some even require no down payment at all.

Specifically, you can get Federal Housing Administration loans with a 3.5% down payment. Lenders also offer conventional loan programs with 3% down, including Fannie Mae’s HomeReady mortgage and Freddie Mac’s Home Possible mortgage. With Veterans Affairs and U.S. Department of Agriculture loans, there’s no down payment requirement.

The reality is that many homebuyers put down much less than 20%. The median down payment in 2019 was 12% for all buyers, 6% for first-time buyers and 16% for repeat buyers, according to the most recent report from the National Association of Realtors.

How Does COVID-19 Affect Mortgage Down Payments?

Some lenders use stricter criteria to approve borrowers because COVID-19 has raised the risk of default and forbearance. “An emphasis was placed on making sure income/employment documentation is current,” says Rob Wilson, vice president, correspondent and warehouse sales executive at Merchants Mortgage. “As for down payment requirements, those (requirements) did not change due to the pandemic.”

That said, increasing your credit score, reducing your debt-to-income ratio and building a larger down payment could all help improve your chances of closing on a mortgage with favorable terms. While consumer spending has rebounded since the beginning of the pandemic, now is a good time to work on improving your financial situation and socking away more money than usual instead of taking trips, eating out and paying for other activities that may not align with health expert recommendations as the delta variant surges.

[Read: Best Mortgage Refinance Lenders.]

How Can You Decide How Much to Put Down on a House?

Among many factors, your finances and your goals for the home can help you choose the right down payment amount.

How much money should you put down on a house? Here are some questions to consider:

— Will the house require upgrades and updates?

— Are you handling a lot of other debts?

— How secure is your job?

Only you, and not lenders, can determine your ideal down payment. You can come up with that figure by giving thought to:

The monthly mortgage payment you can afford. The more money you put down, the less you have to borrow and the lower your monthly payments will be. Typically, you need to put down a lot to make a big difference in your monthly payment because home loans are so large.

If you have flexibility with how much you can put down, run some numbers to see the difference in your monthly payment and what’s best for your budget. Let’s look at an example using a $250,000 home.

A 30-year fixed-rate mortgage at 3.5% interest and 3% down would result in a monthly principal and interest payment of $1,088.

Putting 5% down drops your monthly payment by only $22, but 10% down means a monthly savings of $78 compared with a 3% down payment. That can make a big difference over time.

A mortgage calculator can be a helpful tool to use for estimating a comfortable payment. Keep in mind that lenders prefer your mortgage payment, plus taxes and insurance payments, to be less than or equal to 25% to 28% of your gross monthly income.

Private mortgage insurance. If you put down less than 20% on a conventional loan, you could be on the hook for private mortgage insurance, or PMI. If you can’t afford a 20% down payment, PMI may be a given.

Also, mortgage insurance or similar fees are required on some government-backed loans, regardless of how much you put down.

But if you can reasonably afford to avoid PMI, you may want to do so by making a larger down payment.

Interest rate. As you increase your down payment, your interest rate may decrease because you pose less risk to your lender.

Overall, interest rates remain near record lows, regardless of the down payment you make and the loan you choose. If you can stretch to make your down payment large enough, you could score the lowest interest rate you’ll likely see in your lifetime.

Closing costs. As you’re deciding how much money to put down on your next home, consider your closing costs. These costs typically amount to between 2% and 5% of the house’s price, and you can pay them upfront or roll them into your loan.

Paying closing costs upfront means you can’t use that money for your down payment, but financing the costs will increase your monthly payment and total interest charges. You’ll pay either way but need to decide what makes more sense for you.

Emergency savings. The more money you put down, the lower your monthly mortgage payment because you’re financing less of the home’s purchase price. But if you drain your savings account, you could set yourself up for trouble.

“Putting the most you can in as a down payment will keep your monthly payments low and help you build equity faster,” says Nadia Aziz, general manager of home loans at Opendoor. “But homebuyers should also make sure they leave enough money in their bank accounts to continue to pay for living expenses, food, health and more. Being a homeowner also means covering the costs of maintaining the property, which should be accounted for in your monthly budget.”

Homeowners should strive to keep three months of mortgage payments in a savings account. That way, you can address financial emergencies that come up without impacting your ability to make your mortgage payments and meet other financial obligations.

You’ll also need to set aside a portion of your income for general home maintenance. Save at least 1% of your home’s value annually for costs ranging from a new roof or furnace to landscaping or painting.

Plans for the home. A loan program with a low or no down payment can be appealing, but it puts you at risk of negative equity if your home’s value decreases. That means you owe more than your home is worth, which is also known as being underwater on your mortgage.

That’s not a problem if you plan to stay in the home long enough to build more equity. But this could be a problem if you need to sell your home soon after buying it.

That’s not to say you should be wary of loan programs with a high loan-to-value ratio, says Wilson. “They serve a great purpose in creating homeownership. They can allow many more people to obtain homeownership and begin building wealth,” he adds. “But homeowners should be aware of their leverage and additional costs that come along with homeownership. Making sure you have adequate reserves will provide peace of mind.”

Competition. If you’re in a seller’s market, you’re likely competing against multiple offers. According to Aziz, a down payment could give you a significant advantage.

“With a higher down payment, there’s less opportunity for fallout during the financing process,” she says. “Also, in today’s market, where homes are selling fast and for above-asking price, a higher down payment can give sellers confidence in your ability to cover the difference in the offer price or loan amount and appraised value.”

[Read: Best FHA Loans.]

Can You Get Down Payment Assistance?

Several national and local programs can help eligible buyers get into homes, but you typically have to satisfy program requirements.

State programs, for example, might offer a grant or a second mortgage to cover a down payment and a portion of closing costs for creditworthy borrowers who meet lending requirements.

Some programs are available only to low-income homebuyers and may come with strings attached. You may need to live in the home you buy for a certain amount of time, for example, before a second loan covering the down payment and the closing costs is forgiven. Otherwise, you’ll need to repay the amount you received.

If the pandemic has allowed you to save more for your down payment, historically low rates could mean it’s time to buy. In spite of COVID-19, lenders are busy.

Harry Byrne

Harry Byrne

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