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Ups and Downs of Down Payments

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Conventional wisdom tells homebuyers to save up a 20% down payment for their homes. But this general rule isn’t widely observed. In 2017, the median down payment in the U.S. was 10% for all homebuyers and just 5% for first-time buyers, according to the National Association of Realtors.

Of course, there are good reasons 20% has become the benchmark number that homebuyers are encouraged to shoot for. It’s not a fast way to build equity. You’re more likely to score a lower mortgage rate and reduce the all-important debt-to-income ratio, which then makes you more likely to qualify for a mortgage in the first place. Furthermore, putting down at least 20% means you can avoid paying private mortgage insurance (PMI).

In spite of these pros for a larger down payment, it’s understandably tough for buyers to put down 20% upfront, especially if they are in an expensive market.

In fact, it’s not always better to make a large down payment, especially when there are many low down payment choices available to homebuyers today. When deciding how much to put down on a mortgage, you need to to make a holistic assessment of your own financial situation as well as familiarize yourself with your local housing market trends.

Deciding how much to put down on a mortgage

How do you decide how much to put down? Unfortunately, there is no generic answer that fits everyone.

In general, the bigger the down payment, the lower the amount of money you borrow, and the lower your mortgage payment is likely to be. This will save you money in two ways. One, you will pay less in mortgage interest over time. Two, it will lower your monthly payments for the life of the loan.

It’s common these days that many first-time homebuyers are also grappling with student loans and other types of debt. In a housing market where home prices are steadily increasing, experts say it may make more sense for most people to buy a house with a smaller down payment, which could free up funds to get rid of other debt that carrying a higher interest, instead of scrounging up for that 20% down payment.

Options for smaller down payments exist with good terms for eligible borrowers. In this post, we have mortgage experts analyze four down payment options and list the pros and cons of each.

No down payment mortgage options
Pros of a 0% down payment Cons of a 0% down payment
  • Homeownership is more accessible.
  • Both loan options we list in this section are insured by the government, which have cheaper mortgage rates and more lenient credit requirements than conventional financing. For instance, the average 30-year mortgage rate for VA loans was 4.63% in April, almost 20 basis points lower the rate for a conventional loan — 4.80%— according to Ellie Mae, a data solutions company for the mortgage finance industry.
  • If you don’t put any money down upfront, you’ll have a higher monthly mortgage payment.
  • It will take longer for you to build equity in your home
  • You will pay more in interest over time.
  • Richard Sharga, executive vice president of Carrington Mortgage Holdings, said borrowers looking for 0% down payments typically don’t have the financial wherewithal to handle homeownership. In the event where home prices slide, these borrowers could be exposed to great risk of becoming “underwater” on their loan — owing more than their home is worth.

VA loan

Backed by the Department of Veterans Affairs, VA loans allow eligible veterans to purchase homes with a 0% down payment as long as they have “satisfactory credit.” While mortgage insurance is not required, first-time VA loan borrowers currently have to pay a funding fee of 1.25% -2.4% of your loan amount.

It’s important to note that the VA does not issue loans itself. Rather, conventional lenders are approved by the VA to issue loans on their behalf. That means you’ll have to meet the individual lenders borrowing requirements in order to qualify.

USDA loan

Americans may qualify for a USDA mortgage loan if they live in eligible rural areas. The program is designed to help low- to moderate-income homebuyers. Borrowers who meet the income and address eligibilities don’t have to put down anything to secure a loan. Although the USDA does not impose a minimum credit score requirement, lenders typically require a minimum credit score between 620 to 640 for a USDA loan. Through September 2018, USDA borrowers will have to pay an upfront guarantee fee of 1% at the closing of a loan and an annual fee of 0.35% of the loan amount.

Putting down less than 5%
Pros of putting own less than 5% Cons of putting own less than 5%
  • Making a small down payment frees up your cash flow, which allows you to pursue other financial goals while still pursuing homeownership.
  • “Getting into a house today with 3% down or 3.5% down and making those payments for the next 10 years lets you build up equity over that period of time and gives you the opportunity to start to build wealth instead of just saving money to make a bigger down payment,” Sharga said.
  • In general, you will be required to pay private mortgage insurance (PMI) on a conventional loan if your down payment is smaller than 20%.
  • Doug Crouse, a mortgage loan originator with the UMB Bank in Kansas City, Mo., said a borrower with a 5% down payment may have a higher mortgage insurance rate than someone putting down 10%. This is because the more home equity you have, the less risk you present as a borrower to your lender.


Fannie Mae’s HomeReady mortgage program is designed for low-income homebuyers. The HomeReady loan requires a minimum 3% down payment, but borrowers have to pay mortgage insurance until your loan-to-value ratio falls to 80% or below. You don’t need excellent credit to qualify; you can secure a loan with a minimum FICO score of 620.

Home Possible®

This is Freddie Mac’s answer to Fannie Mae’s HomeReady mortgage program. Similarly, Freddie Mac allows borrowers to put down 3%-5% for a Home Possible mortgage. Mortgage insurance is required, but it can be removed after your home equity reaches 20%. You don’t actually need a credit score to secure a loan if you make a 5% down payment. However, this loan is only available to only low- to moderate-income homebuyers or people in high-cost or underserved communities. Use this tool to determine if you can qualify for a Freddie Mac Home Possible mortgage based on your home address and income.

FHA loan

Borrowers can put down as little as 3.5% of a down payment for an FHA loan, insured by the Federal Housing Administration. But if you have a poor FICO credit score (500-579), the down payment requirement can go up to 10%. The downside is you’ll have to pay a one-time FHA mortgage insurance premium upfront and a monthly insurance premium, regardless of how much you put down. Still, if your credit is not great and you can’t put down 20%, an FHA loan is a good option for you. Check out the U.S. Department of Housing and Urban Development (HUD)’s searchable database to find FHA-approved lenders in your area.

Conventional loans

Some mortgage lenders offer small down payment mortgages — as little as 3% down payment — to borrowers who qualify. For example, Bank of America offers an affordable loan solution that requires just 3% down and borrowers do not have to pay for private mortgage insurance either. Just keep in mind these types of loans will likely come with higher mortgage rates.

If the lender does require PMI, remember, you can request to have your PMI dropped once you have at least 20% equity in the home.

Putting down 10%
Pros of a 10% down payment Cons of a 10% down payment
  • You can get a standard conventional mortgage with just 10%, and it’s possible a lender will waive your PMI if you can prove you have a good track record of employment and a stable income, Sharga said.
  • Even if you have to pay PMI, borrowers who put down 10% are likely to get a lower rate than those putting down less.
  • Your monthly mortgage payments will be higher as opposed to putting down 20% because you’re financing more.
  • If you can’t avoid paying the PMI, that cost will be folded into your monthly mortgage payments or you have to make an upfront payment at the closing of the house, which makes the total loan cost higher.


SoFi is an online lender offers mortgages up to $3 million with as little as 10% down payment. But borrowers typically need a stellar credit score — at least 680 — to secure a SoFi mortgage. The good thing is SoFi doesn’t require mortgage insurance nor does it charge origination fees. That being said, you are likely to have a higher mortgage rate than you might find at another lender that does charge PMI.

Putting down 20%

In general, a 20% down payment makes more sense for people who are debt-free and have a flush emergency fund already in place.

A 20% down payment will probably get you a better interest rate than what you’d get with a lower down payment. Sharga said if you have a low FICO score, you could offset some of the risks you present as a borrower with a down payment larger than 20% to get a better mortgage rate.

Putting down 20%
Pros of a 20% down payment Cons of a 20% down payment
  • You may qualify for better interest rates or loan terms. You won’t have to pay PMI. Having 20% equity gives you a cushion: If the market slides a little when decide to sell, you wouldn’t be underwater.
  • In sum, with a big down payment, you can reduce your monthly payment and make it easier on your monthly budget, and in the long run, you save money by reducing interest costs over the life of the loan.
  • Saving that much may take longer to buy the home you want, and it limits your opportunities in investing money elsewhere. While you are saving money for the down payment, home prices and mortgage rates may go up, which will possibly wipe out whatever you save by not paying PMI.

Dealing with PMI

You can typically request your lender to cancel PMI once you have reached at least a 78% loan-to-value ratio on your mortgage.

How to get help with your down payment

Donations from family and friends

Crouse said rules on receiving cash gifts to pay down a house have relaxed since 2016; It’s common with conventional financing that lenders don’t require personal funds as the sole source of funding for a down payment. Sharga suggested you check with your lender about donations as different lenders may have different policies.

FHA-secured loans allow borrowers to pay down a house with gifts from friends and family, although documents to explain ties with the borrower are required.

Fannie Mae’s HomeReady loans don’t require minimum personal funds for a down payment, either. It instead allows borrowers to use multiple sources of funding for their down payments, such as a gift from family or friends.

Down payment assistance programs

There are also third-party organizations — local governments, charitable foundations and others — that provide financial assistance for homebuyers to put together enough money for a down payment.

Oftentimes, down payment assistance programs impose income eligibility requirements and are limited to first-time buyers for their primary homes. Down payment assistance can come in forms of grants or forgivable loans. You may be asked to repay it when you sell the home, or it may be waived if you stay in the home long enough. For instance, this program in New York offers up to $25,000 to eligible first-time homebuyers

We recommend you reach out to your state and local Housing Finance Agency to learn about these assistance programs. You can also visit the Down Payment Resource website that tracks financial-assistance programs from over 1,200 Housing Finance Agencies.

Bottom line

How much to put down for a home is a personal decision, and you should assess your personal finance carefully before making the decision. However big a down payment you make, you should not deplete your savings for that. Because this may leave yourself exposed to significant financial risks when an unexpected emergency happens, such as losing a job. You want to make sure that you always have some cash reserves on hand.


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