Buying a new car or home in cash may be difficult for the average person to afford. Fortunately, there are financing options available—but not without paying at least a small amount upfront. To approve your loan, most lenders are looking for a down payment.
Saving for a home down payment may be the most daunting part of the homebuying process. Depending on how much home you’re planning to buy, it could take years to set aside enough cash. While you may believe a 20% down payment is the gold standard, recent data tells a different story. In fact, most buyers who finance their homes put down less.
Frankie Rendón, a Tampa, Florida-based media specialist at Student Loan Hero, recently bought a home. His family’s down payment decision wasn’t easy—especially with the pressure to pay more from the lender. Ultimately, they chose to put down 15% to make their mortgage payments smaller.
There’s no doubt about it: Spending a big chunk of money on a down payment can be nerve-wracking. Before deciding on exactly how much to fork over, it’s helpful to understand some of the basics. Here’s what you need to know about down payments.
What is a down payment?
When a lender loans you money for a house, they are taking on a big risk. After all, your payments may be late or you may even default on the loan. Your down payment is one way to reduce the lender’s risk.
Most mortgages require a down payment, which is calculated as a percentage of the home’s selling price. To qualify, you’ll need to have the down payment ready and available before closing. Your mortgage covers the rest of the cost.
“To buy a home, you need to show you can pay the down payment by providing what’s called a proof of funds,” said Beatrice de Jong, a Los Angeles-based real estate agent and consumer trends expert at Opendoor. Your proof of funds is typically in the form of your bank statements that show your ability to cover the transaction. These statements need to prove you can afford the down payment.
If you can’t put down 20%, de Jong said there are mortgage options available, but they come at a price. Putting down less than 20% may increase your upfront fees, interest rate and mortgage payments. She said these types of loan programs are especially popular with first-time homebuyers.
How do down payments work?
It’s normal to feel uneasy about handing over your down payment. Luckily, you won’t have to pay it until closing. There are other costs to pay upfront, though. When you make an offer, you will write an “earnest money” check, which shows the seller you are a serious buyer. This money goes into an escrow account. If your offer is accepted, your earnest money goes toward your down payment and closing costs. But if the seller doesn’t accept your offer, you will get your earnest money back.
When it comes to paying for the down payment, the logistics may vary by lender, said Matt Hackett, operations manager of Equity Now in New York City. Some companies will ask you to wire funds on the day of closing. Others may be looking for a certified check. “Personal checks are rarely accepted unless there is an adjustment of some sort that needs to be sorted out at closing—usually under $500,” he said.
Your down payment money should be easy to access, and cash is the most convenient option. If you are selling investments, be sure to allow for extra time. It will take a few days for the funds to settle and transfer into your checking account.
How much down payment for a house?
Deciding on a down payment may not be an easy decision. The amount you spend may impact the types of loans for which you qualify. It may also impact other aspects of your mortgage, including:
- The size of your monthly mortgage payments
- Your mortgage’s interest rate
- Whether your lender tacks on mortgage insurance
- Leverage to negotiate on closing costs
“The larger the down payment, the better,” said Alex Glaser, a real estate agent with The Glaser Group in Richmond, Virginia. If you put down at least 20%, you may have access to better terms and rates. Even if you can’t afford 20%, there may be benefits to putting down as much as you can afford.
Down payment example
For Rendón, the decision came down to their monthly mortgage payment and closing costs. His family chose to put down 15% on their Tampa home. “As an incentive, the builder offered us $13,000 in closing costs, so that made things a little easier,” he said.
Here’s a breakdown of their mortgage:
- Home purchase price: $264,900
- 15% down payment: $39,735
- Mortgage amount: $225,165
- Interest rate: 4.5%
- Monthly mortgage payment: $1,141
Note: Monthly mortgage payment amount may not include expenses like property taxes, homeowners insurance or private mortgage insurance.
Put down at least 20% to avoid mortgage insurance
Mortgage insurance is another way lenders protect themselves from riskier buyers. If you put down less than 20%, lenders will charge mortgage insurance. Depending on your type of loan, you may have to pay an extra fee upfront, a higher ongoing monthly payment or both.
Bigger down payments may offer leverage
Putting down at least 20% may also give you a leg up on the competition. If there are many offers, a bigger down payment could improve the odds of your offer getting accepted. “Typically, the higher the down payment, the more qualified the buyer is; therefore, less likely for issues with financing later on in the process,” Glaser added.
Should I empty my savings to put a down payment on a house?
With mortgage insurance looming, it may be tempting to empty your savings to cover the down payment. Glaser said this is a mistake because some lenders expect you to keep a certain amount of cash in your bank account. Even if they don’t, it’s critical to have money handy to pay for ongoing repairs and maintenance. “Being a homeowner comes with the costs of maintaining the property, which should be accounted for in your monthly budget,” de Jong said.
If you can’t afford the down payment you want, there is nothing wrong with pushing back your homebuying timeline. You shouldn’t rely on gifts from family, either. “Avoid getting any portion of your down payment money as a gift without talking to your lender first,” Glaser said. “Lender guidelines for gift money are very strict and are different depending on the type of loan you are getting.”
Be strategic with your down payment
Making a down payment may be the biggest check you ever write. Before handing over a major chunk of your life savings, you should know how it may impact your mortgage. A bigger down payment will mean lower monthly payments. It may also offer leverage if you are competing on bids for your dream home.
But you shouldn’t spend every dollar to your name. Experts recommend keeping an emergency fund of three to six months' of expenses for life’s unexpected bills. You should also budget for the ongoing upkeep of your home—and save every month for bigger repairs like a new roof. By planning ahead, you may be able to rest easier in your new home.