Mortgage Down Payments

Planning for your down payment is a critical part of the home buying process. Knowing how to effectively save for down payments, how much you’ll need, and what helpful resources are at your disposal will help make your home buying experience go smoothly.

A down payment is cash paid upfront by the borrower towards a loan. This is not financed by a lender and can be beneficial in securing the best rates and terms, as well as simply needed for approval in some cases. Down payments are often required in many types of loans such as mortgages and auto loans.

Lender approvals are based on the risk of lending to a potential borrower. By having the borrower pay a portion of the purchase amount upfront with a down payment, it can lower the risk involved in the loan by lowering the overall amount borrowed, improving a borrower’s debt-to-income ratio, and showing commitment to the agreement, among other things.

The amount required for a mortgage down payment will vary depending on many factors such as the mortgage lender, as well as the borrower’s credit situation and financial standing. 

While there are many programs that have small minimum down payment requirements, consider all options and explore how a larger down payment might be able to benefit you in the long run.

Standard lender programs can have down payments as low as 1% or 2% for highly qualified buyers. Independent lenders often have unique offerings, so be sure to do adequate research before committing to a mortgage lender.

Fannie Mae and Freddie Mac are enterprises sponsored by the U.S. government that buy and sell mortgages. Through Fannie Mae or Freddie Mac programs, borrowers with qualifying credit can get down payment requirements as low as 3% of the loan value.

Jumbo loans are larger mortgages that exceed amounts for what is considered “conforming”, set by the federal government. These loans are typically reserved for good credit buyers. In addition to having a larger borrowed amount, the minimum down payment for these loans is higher – typically 10%.

FHA Loans – 3.5% Down

Qualified borrowers with credit scores of at least 580 in FHA loans can use a down payment as low as 3.5%. A larger down payment may be required for borrowers with lower credit scores or imperfect payment histories.

VA Loans – 0% Down

VA mortgage loans are backed by the U.S. Department of Veterans Affairs. Buyers must be veterans, military personnel, or their families and can qualify for zero down mortgages. There is a funding fee, however, that is required for VA home loans.

USDA Loans – 0% Down

USDA loans backed by the United States Department of Agriculture typically have no down payment required, but can come with an upfront fee similar to VA loans. 

Mortgage lenders will usually require a down payment to help mitigate risk. By putting a down payment towards a mortgage, home buyers are “paying down” the purchase price of their home, therefore lowering the amount being borrowed as well as their debt-to-income (DTI) ratio and other financial measurements.

Down payments not only lower the amount being borrowed of the loan to reduce the potential loss for lenders if they need to foreclose on the home, but it also establishes clear trust indicators. It shows the lenders that you’re financially prepared to make this purchase and invested in doing so.

There are of course, benefits to providing a larger down payment when getting a mortgage. Just because you know the minimum amount required for loan approval, that doesn’t mean that’s the amount you should put down. 

While saving up for a substantial down payment for your mortgage can be advantageous, there are a few key things to keep in mind.

Savings Accounts & Emergency Funds – Depleting your life’s savings or emergency funds for large purchases such as a home is never advised. This can be financially dangerous if something unexpected were to happen. You’re better off either saving more for your down payment, or putting less down initially to ensure you have emergencies covered.

Inflation – Home prices haven’t gone down over the years, so waiting too long to save up for that down payment may not be as beneficial as it seems now.

Depending on how much you have saved when starting your home buying journey and the cost of your potential home, putting down 20% to avoid PMI may or may not be attainable. 

PMI is paid to protect your lender in the event that you default on the loan. So, that money isn’t actually being put towards your new home at all. For that reason, we always recommend putting a 20% down payment on your home loan if you’re able to without draining your savings accounts. 

The flip side of that coin is that saving large sums of money takes time. If the time it will take to save 20% is longer than you’re willing to wait to buy your home, there are many scenarios where paying PMI for a while might make sense. Just be sure you think things through and stay within your budget.

Keeping in mind all of the benefits of larger down payments and the ability to avoid paying PMI if you can put at least 20% down, the answer to how much you should put down on your mortgage loan ultimately depends on your unique situation. 

Saving for a larger down payment up front will lower your monthly payments and save you money in the long run. However, it may leave you in a difficult spot financially after buying your home.

The key is to find the balance so that you still have some cushion with an emergency fund and some savings, but secure the best loan options that you can.

While a 20% down payment may be ideal, it’s not what the average homebuyer is capable of doing. The average down payment for houses in condos in 2019 was 12%. For first time homebuyers it’s even lower, at just 6% [1].

The best way to save for a mortgage down payment is to simply have it as one of your savings goals and contribute to it over time, just as you would any other savings goal. However, if that savings time isn’t a luxury you can afford, there are a few options that you can consider.

If you have a lot of belongings that you no longer want or need, you could consider selling them to collect some extra cash for your down payment. Another upside to this method – less to move! Be sure to keep this in check so you don’t end up with regrets of what you’ve sold afterwards.

If you have funds that you can comfortably tap into from accounts without early withdrawal penalties or draining your savings, this could also be a viable option.

There are also down payment assistance (DPA) programs that vary from state to state. There are DPA Grants and several types of DPA loans that can potentially be taken advantage of.

Grants – assistance that does not need to be repaid. There may be grants available for first-time homebuyers and other programs.

Loans – DPA loans often have lower interest rates than mortgages and in some cases may be interest-free. The three types of DPA loans have different repayment requirements. 

Some are standard loans that need to be paid simultaneously with your mortgage. 

Others have deferred payments which will take effect at a later date when you sell or refinance the home. 

There are even some forgivable DPA loans that do not need to be repaid unless the borrower decides to sell or refinance before an agreed upon term.

Conventional, FHA, and some other types of mortgages do not allow for personal loans to be used to fund a down payment on a mortgage. Regardless, this is typically not a great option, as it will initiate significant debt that will need to be repaid. 

In the event that a lender does allow for a down payment funded via personal loan, there’s a chance that you may default more easily due to this stacked debt. And once you fall behind, it would be difficult to catch back up. 

The best way to offset this is through effective planning and knowing the resources available to you. Finding ways to save up for your down payment and researching any DPA programs that are available to you often serve as a much better option than funding debt with debt.