How much is a down payment for a house? If you’ve dipped any toes into the water of homeownership, you have probably asked yourself this question. Making a down payment on a home is an important step, but it can also seem like one of the biggest hurdles in the journey towards buying a home. But a down payment does not have to be intimidating, for many reasons—some of which are within the buyer’s control.
The down payment amount can depend on a range of factors, including:
- The type of home loan you get, whether it’s a conventional loan or government-insured loan like VA, FHA or USDA.
- Your lender. What kind of rate is your lender offering you?
- Your priorities. Are you looking for a competitive edge against other home buyers? Are you looking for a lower monthly payment? Do you need to keep cash reserved for savings and maintenance? Your particular situation certainly impacts the percentage amount you put down on a house.
With the right information about the housing market in 2023, you can stop wondering how much to put down on a house, and instead focus on the things that matter.
What Is a Down Payment?
You probably have heard of a “down payment,” but you may not be entirely clear on what it means. We’re here to help.
A down payment is a lump cash payment made upfront to make a large purchase, such as a home or a vehicle. The down payment gets the ball rolling on securing ownership and laying out plans for the rest of the financing.
After the initial down payment, the remaining cost of the purchase is usually financed through a loan, which can be secured in myriad ways such as through conventional or jumbo loans, as well as government-insured loans. The amount of the upfront down payment can impact the duration of the loan and how much is owed per month.
Understanding Down Payment On a House
So, how do down payments actually work, usually?
The down payment represents the home buyer’s initial ownership stake in the house. They are usually presented as a percentage of the price of the home (5%, 10%, 20%, etc.), and then a home loan or a mortgage is typically used to pay the remaining balance. Most mortgages require a down payment, but it is important to note that not all do—some mortgages backed by the federal government may not require a down payment. Citation
So, a down payment gets the ball rolling. It gets you started on your home ownership and dictates the terms of how the rest of the home’s purchase price will be paid off.
Down Payment and LTV Ratio
When understanding down payments, it is critical to understanding loan-to-value (LTV) ratios. The LTV ratio is a simple equation, equal to the amount of the loan divided by the appraisal value or the purchase price of the house (whichever is the lesser value). The LTV ratio essentially tells you how much you will owe on the home after your down payment is made.
A higher down payment not only lowers your loan amount, it also lowers your LTV ratio. This is important because lenders consider your LTV ratio when deciding whether or not to extend the loan.
How Your Down Payment Impacts Your Offers
You may be wondering: The market is crazy right now, can the down payment impact my chances of securing the house I want? How does it affect my offer?
The down payment can affect your ability to beat out other offers. From the seller’s perspective, a higher down payment is more attractive, because it means the buyer has more skin in the game. A higher down payment offer can indicate to the seller that you have enough cash on hand, as well as good finances that can be approved by a mortgage lender. Not to mention, a higher down payment could beat out other offers that are below the asking price.
So while there are certain advantages you can get from a lower down payment, a higher number undoubtedly increases your chances of securing the house you’re after.
Understanding PMI
What is PMI? PMI is private mortgage insurance, and it is required for conventional loan borrowers who make lower down payments on a home purchase.
PMI protects the lender in the event that you stop making payments on your home loan. When you make a lower down payment on a house, a lender can be wary of your ability to pay off the remaining balance. So private mortgage insurance is required.
Generally, making a down payment of 20% or more can help you avoid having to buy private mortgage insurance. If 20% is not feasible, it’s usually acceptable to ask your lender to remove PMI once you reach 20% equity in the house through loan payments.
Do you need to put down 20%?
Now that we’ve gone over the various elements of a down payment and subsequent loan (and mortgage), you are probably wondering how much is the right amount to put down on a house.
A 20% down payment is generally the line of demarcation on what constitutes a low vs. high down payment number. While very few lenders require a 20% down payment, there are some advantages to putting down at least 20%. In order to determine whether it makes sense for your particular situation, you will need to weigh the pros and cons of doing so.
Pros and Cons of 20% Down Payment
To help you weigh the pros and cons of a 20% down payment, we’ve put together a generalized list:
Pros
- No private mortgage insurance (PMI), as required by the lender for payments less than 20%.
- Better interest rates.
- Lower monthly payments.
- Competitive edge over other home buyers.
Cons
Financial risk. If you need cash for an emergency or savings, putting large sums of money into a down payment can be risky.
By making a big down payment, you may have less money to spend on repairs and other maintenance issues on the home you’re buying. These issues will inevitably crop up!
It can take a while to save up the money needed for a 20% down payment.