How much down payment do you need for a house?

House with American flag and sign
You don’t always need to put down 20% when buying a home.

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If you are planning to buy a house, you will need money for a down payment, but exactly how much you are expected to put down is another matter. It depends on the price range you shop in, the type of mortgage you use, and your monthly budget.

Here’s how to accurately calculate your down payment (and no, 20% isn’t required).

What Mortgage Lenders Require

Each mortgage program has different down payment requirements. Your first step, then, is to determine the type of loan you will use to buy your home.

If you are ready to begin the mortgage application process, it is also important to shop around lenders to find the best term for you.

Your mortgage options will typically include:

  • FHA Loans: These require a 3.5% down payment if you have a credit score of 580 or higher. If your score is between 500 and 579, you will need a 10% deposit. You will also need to pay a mortgage loan insurance premium up front and add one to your monthly mortgage payment.
  • Conventional loans: With these mortgages, you will need at least 3% down payment. Most mortgage lenders will also require you to pay a monthly installment private mortgage insurance (PMI) if your down payment is less than 20%.
  • USDA Loans: These loans actually require no down payment. You must, however, buy your home in a designated rural area and fall under a certain income threshold.
  • VA Loans: Like USDA loans, these mortgages also have no down payment requirements. However, they are only available to veterans, military members and their spouses.

Not sure which loan option is right for you? Use an online tool today to determine what is best for you financially.

Keep in mind: Knowing your loan program is only part of the equation. To accurately estimate your down payment, you’ll also need a good idea of ​​the price range in which you’re shopping. For example, if you are looking in the $350,000 range and you plan to use an FHA loan, you can multiply $350,000 by 0.035 (3.5%) and know that you would need a down payment of at least $12,250.

Personal considerations

As you can see above, no mortgage simply requires a 20% down payment. But putting less costs you.

On conventional loans, for example, depositing less than 20% would mean adding PMI costs to your monthly mortgage payment. According to Freddie Mac, these typically cost between $30 and $70 per $100,000 borrowed. So on a $400,000 loan, that would be an extra $120-280 per month.

You should also consider your monthly budget when determining what to deposit. A small down payment will mean a bigger monthly mortgage and it will cost you more in interest in the long run.

Let’s look at some examples. Suppose you buy a house for $400,000 using a conventional 30-year mortgage at an interest rate of 5.5%. Here’s what your payments and interest charges would look like at different down payment levels:

DEPOSIT AMOUNT

MONTHLY PAYMENT (PRINCIPAL AND INTEREST)

LONG-TERM INTEREST COSTS

3% ($12,000)

$2,203

$405,087

5% ($20,000)

$2,157

$396,735

10% ($40,000)

$2,044

$375,854

20% ($80,000)

$1,816

$334,092

Advantages and disadvantages of a 20% deposit

Obviously, a large down payment is beneficial. It can give you a lower monthly payment, help you avoid mortgage insurance, and significantly lower your total interest costs.

But finding $80,000 (as in the table above) is certainly not easy. It might even deplete your savings. This would make things difficult if you had a sudden home repair or a medical bill popping up. If you were to lose your job or another source of income, it might even be difficult to pay your mortgagethus exposing you to the risk of foreclosure.

If you’re not sure how much to set aside for the purchase of your home, talk to a mortgage or financial advisor. They can run the numbers and help you figure out what’s best for your budget.

About Matthew R. Dailey

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