What Size Down Payment Do You Need to Buy a Home?

When we bought our first home back in 1993, we did so with a down payment of 5%. A decade ago, you could even find home loans that didn’t require any down payment.

Since the real estate market crash, though, lenders have tightened their underwriting requirements. Today, interest rates on mortgages are soaring and zero-down loans are, for the most part, a thing of the past. So, how big of a down payment do you need to buy a home today? It’s an important question to ask, especially if you’re considering buying anytime soon.

But how much money do you need first? And what’s the average down payment on a house? Well, that depends on the type of mortgage you’re after. A few zero-down mortgages still exist, but they’re generally reserved for certain applicants. Your down payment requirement could range up to 20 percent.

Related: When is the Best Time to Buy a House?

Down Payment Requirements for Different Mortgages

1. VA Loans — 0% down payment

If you’re a veteran, you may be able to get a mortgage backed by the Department of Veterans Affairs. If you qualify, you can use a no-down payment mortgage option. You also won’t be required to pay private mortgage insurance (PMI). 

You can also use a VA loan to repair a home or refinance your existing mortgage. The VA program also allows for upgrades that make the home accessible, if that’s what you need.

2. USDA Loans — 0% down payment

If your dream is to live in the middle of nowhere, check out USDA loans. These loans, backed by the Department of Agriculture, are only eligible for homes in certain rural areas.

If you meet the income requirements, you may qualify for a zero-down mortgage. You also may be exempt from paying PMI. If your income is very low, you may even qualify for extended financing to make your payments more affordable.

Higher-income earners can still qualify for this loan, but their income must be below the income limit of $110,650 for a one- to four-member household. You can also use this loan to rebuild or rehabilitate a qualifying property.

Related: What Kind of Mortgage Does Your Credit Score Qualify For?

3. HomePath — 3% down payment

HomePath is a financing program available when you purchase a home owned by Fannie Mae. Just to be clear, Fannie Mae owns homes that have gone through the foreclosure process, so that means you’ll be purchasing a foreclosed home or one via short sale with this type of loan.

I’ve purchased five foreclosures as investments, and I’ve walked through dozens of foreclosures in the process. Some homes remind you of the basement in Silence of the Lambs, while others are in excellent condition.

Going this route, it may take some time to find the right home, but it can be worth the effort. There are two big benefits of HomePath loans. First, the down payment requirement can be as low as 3%. Second, it doesn’t require private mortgage insurance.

4. HomePossible — 3% down payment

If you meet the income requirements, you may be eligible for a HomePossible loan from Freddie Mac, and a 3% down payment. This down payment can come from a combination of sources, including family, employer-assistance programs, secondary financing, and sweat equity.

These mortgages are reserved for borrowers under a certain income level (limited to 80% of Area Median Income) in underserved or expensive areas.

5. FHA Loan — 3.5% down payment

FHA loans have been around since 1934, and qualifying applicants can purchase a home with an FHA loan with a down payment of just 3.5%.

These mortgages, backed by the Federal Housing Administration, now require private mortgage insurance for either the life of the loan or a specified period, which can make your monthly payments more expensive. And the only way to get out of the payments is to refinance to a conventional loan.

The credit score requirements for an FHA mortgage are fairly low, around 580. But you will have to have enough money in the bank to cover that down payment. The FHA also offers refinancing programs and programs that allow you to finance renovation costs on a fixer-upper.

6. Conventional Loans — 5% down payment

If you don’t qualify for one of the above government-guaranteed programs, you’ll likely need a conventional mortgage loan, which means you’re borrowing from a private entity instead of a government-backed loan.

This means you’re likely looking at a down payment of at least 5-10%. Of course, this doesn’t include other closing costs that you’ll either need to pay or negotiate with the seller to pay. In addition, if you pay less than 20% for your down payment, your lender will likely require PMI.

Caveats of Low Down Payment Mortgages

Like anything in life, just because you can doesn’t mean you should. More specifically, just because you can get a mortgage with a very low—or even no—down payment doesn’t mean you should. 

In some cases, these types of mortgages make sense. But you’ll need to do the math in your particular situation to see which option is best for you. Here are some things to consider when looking at a low down payment mortgage.

Learn More: 16 Types of Mortgages: Which Home Loan is Best for You?

The Perils of Private Mortgage Insurance

When shopping for a mortgage, keep in mind that if you make a down payment of less than 20%, you will almost always be required to pay PMI. 

PMI is a type of insurance that a buyer is required to pay as part of their mortgage that protects the lender for up to 20 percent of the purchase price. 

You’ll pay it monthly as part of your mortgage payment. For example, if you paid a 3% down payment on a $100,000 home, PMI would guarantee $17,000 of the loan. What you’ll pay in PMI will vary depending on your home’s value.

Here are typical PMI rates:

Let’s say you buy a $100,000 home and put 5% down. Your down payment is $5,000, making your mortgage is $95,000. Divide the $95,000 mortgage by 1,500, and you get your monthly PMI cost: $63.33

On a conventionally financed mortgage, you’ll only pay PMI until you reach 80% equity in the home. That can happen either because you pay down the principal or because home values rise in your area. Getting rid of PMI can take a little legwork on your part, but it’s usually worth your while based on the monthly savings alone. 

With many FHA mortgages, however, you’re required to pay PMI for the life of the loan. So let’s say you pay that $63 per month for 30 years’ worth of mortgage payments. That’s about $22,680. To get out of PMI, you’d have to refinance to a conventional mortgage. 

Related: Everything You Need to Know About PMI on FHA Mortgages

It’s good to get rid of PMI when you can. But it’s even better to avoid it in the first place. A fairly straightforward way to do so is to purchase a cheaper home so you can swing the 20% down payment. 

More Time Needed to Build Equity

Many first-time homebuyers are surprised at how long it can take to build equity in a home. Your first several years’ worth of mortgage payments mostly go towards paying interest before you start even touching your principal

Consider that $95,000 mortgage above. Let’s say you’re paying 7.76% interest on that mortgage, today’s average mortgage rate, with a 10% down payment. (It’s worth noting that mortgage rates are currently hovering at record highs, so take that into account when deciding whether to purchase a home.

Using this calculator, you can see that with your first month’s payment, only $60.34 is going toward the principal. The other $552 and change goes towards interest! It isn’t until you’ve been paying on your mortgage for nearly 22 years that your payment is split equally between principal and interest.

The lower your down payment, the less equity you start within your home. And that means it’ll take even longer to build more equity. The same goes for interest rates. See the benefits of a larger down payment yet? That’s not to mention the effects these record-high interest rates have on your equity. 

Resource: How I Bought a House for Next to Nothing, and You Can, Too

Additionally, if you plan to move within the next five years, think twice about buying a home with a low down payment. By the end of that period, it may wind up costing you to get out of your home. Plus, you’ll have built up a little equity to use for a down payment on your next home.

Unaffordable Housing Costs

The biggest issue with a low down payment mortgage is that needing this type of mortgage may be a signal—and not a good one.

If you can’t put aside at least 10% for your down payment, you may be jumping into a mortgage that will ultimately be unaffordable. If you can’t clear out enough money in your budget to save, buying a home is a risky move. 

Sure, your mortgage payments may be cheaper than your rent payments. But now you’ll also be on the hook for all the maintenance and other ongoing costs of the property, in addition to the upfront closing and moving costs of purchasing a home. 

One Benefit of Any Down Payment

On the flip side, in some areas of the country, rent is much more expensive than owning a home. If that’s the case where you live, buying a home with a low down payment may make more sense than renting. 

With rent costs super high, finding room in your budget to save a large down payment can be tough, if not impossible. If you get into a home that is a few hundred bucks a month cheaper than rent, you can save the extra money for emergencies. And once you have a good emergency fund, you can start throwing extra money at the mortgage principal.

Frequently Asked Questions (FAQ)

The Bottom Line

Ultimately, it’s up to you to do the math and figure out whether you should buy with a lower down payment or wait until you have a larger chunk saved up. If you decide to opt for a low down payment mortgage, check out the above-listed programs to get you there and understand the rules so you’re not surprised by the added costs or future payment requirements.