Some buyers pay cash<\/a>, so there\u2019s no mortgage, and therefore no down payment. Some buyers finance the entire purchase with a zero-down-payment loan<\/a>, so there\u2019s no down payment.<\/p>\n Curiosity may be the most common trait when it comes to homebuyers and down payments.<\/p>\n Richie Helali, mortgage sales leader at HomeLight, says down payments are in the conversation daily when he is talking to prospective borrowers. And if they don\u2019t bring it up, he often does.<\/p>\n \u201cA question about down payment is normally one of the first questions I\u2019ll ask a client,\u201d Helali says. \u201cIt\u2019s on almost every single phone call.\u201d<\/p>\n It\u2019s not always clear to a first-time buyer exactly what the down payment is for. Essentially, the down payment is to show lenders that you have a stake in the investment, and something to lose if you don\u2019t hold up your end of the deal. When a buyer has contributed a sizable sum to the purchase of the house, the loan is seen as less risky by the lender.<\/p>\n Indeed, real estate history has shown<\/a> that buyers who have little to no skin in the game are more likely to walk away from a mortgage if the housing market goes south, their employment situation gets shaky, or some other important factor changes in the future and makes it difficult for them to make a payment.<\/p>\n A down payment helps convert someone who is merely a borrower into someone who is part owner of an asset and therefore who is less likely to default on the loan and risk losing that asset through foreclosure.<\/p>\n One of the key concepts around down payments is loan-to-value (LTV) ratio. This figure, usually expressed as a percentage, shows how much money the lender has put up for the home compared to its value. If the home is worth $300,000 and you get a home loan for $270,000, then the LTV is 90%.<\/p>\n Lenders tend to want a lower LTV number. And, from the buyer\u2019s perspective, the less risk there is in the loan, the more likely the buyer is to get a good interest rate and other favorable terms.<\/p>\n \u201cThe higher down payment you place, the lower the risk is for the bank,\u201d Helali says.<\/p>\n \u201cLower risk translates to better terms and interest rates for the buyer.\u201d<\/p><\/blockquote>\n The happy place for LTV for most lenders is 80%. That\u2019s when a buyer is likely to get the best deal.<\/a> In other words, you\u2019ll need to put 20% down on the home\u2019s purchase price.<\/p>\n Here\u2019s how to see if the down payment you have in mind is going to get you there.<\/p>\n To figure LTV, divide the amount of the down payment by the total purchase price of the house. Then express this result as a percentage. Now, subtract that number from 100. The result is your LTV.<\/p>\n For instance, to figure LTV on a $200,000 house with a $40,000 down payment, divide 40,000 by 200,000. The result is 0.2. Expressed as a percentage, that\u2019s 20%. Subtracting 20% percent from 100% gives you 80%. This deal will have an LTV of 80%, which is a good place to target for a buyer.<\/p>\n Having a 20% down payment is not the only way to ease a lender\u2019s worries about repayment. Another financial factor called mortgage insurance can also help.<\/p>\n Mortgage insurance is intended to help the lender avoid financial loss in case the borrower doesn\u2019t repay the loan. Although it benefits the lender, the borrower is the one who pays the premiums on mortgage insurance.<\/p>\n For most loans, if you don\u2019t put at least 20% down<\/a>, then you will have to pay for mortgage insurance.<\/p>\n \u201cWhenever somebody is making a down payment of less than 20%, regardless of the person\u2019s credit score or creditworthiness, that person is going to be five times more likely to eventually be foreclosed on versus somebody who\u2019s putting 20% down,\u201d Helali explains. \u201cFor the bank to mitigate risk, they require somebody putting less than 20% down to have mortgage insurance.\u201d<\/p>\n Mortgage insurance isn\u2019t necessarily forever if you\u2019re using a conventional loan. Once LTV has declined to 80%, due to appreciation increasing the home\u2019s value or the borrower making enough payments to reduce the loan principal sufficiently, the borrower can usually stop paying mortgage insurance.<\/p>\n However, this may take years, and meanwhile, the payments can be a burden. Mortgage insurance premiums usually come to between 0.5% and 1% of the loan amount each year. So on a $200,000 loan, if mortgage insurance was 1%, that would come to $2,000 per year.<\/p>\n These premiums are usually paid monthly as part of your mortgage payment, so in this example mortgage insurance would add $166.67 to the monthly payment. Clearly, putting 20% down can make a difference when it comes to affordability.<\/p>\n So we\u2019ve learned that 20% down pleases the lender, makes it more likely you\u2019ll get a good rate, and can help you avoid mortgage insurance. But do you have to have it?<\/p>\n The answer is: Not at all. In fact, while you might have heard that 20% is the typical or even required down payment, reality is very different.<\/p>\n Most buyers, it turns out, don\u2019t put 20% down. Lodestar Software Solutions tallied up 2019 figures and found that the average buyer put down just 5.3%. The National Association of Realtors reported in 2020 that first-time buyers who financed their homes put down an average of 7%<\/a>. People using a mortgage to buy a second or later home averaged 12% down in 2020, according to NAR.<\/p>\n The difference, Helali says, is due to the value borrowers have accumulated through previous homeownership. \u201cTypically, a first-time homebuyer won\u2019t have 20% down,\u201d he says. \u201cThey\u2019ll move forward with whatever they\u2019re comfortable with, like 5%. If they are not a first-time homebuyer, they may have some equity, and they\u2019ll take some of that equity, if not all of it, and put that toward the home.\u201d<\/p>\n The fact that you don\u2019t have to put down 20% doesn\u2019t mean you should make the smallest down payment possible. And the fact that you can<\/i> put down 20% \u2014 or more \u2014 doesn\u2019t mean that\u2019s necessarily the way to go either. Making the decision of how much to put down is basically a matter of\u00a0examining the pros and cons and fitting the eventual decision to the facts of the specific situation<\/a>.<\/p>\n Here are some of the advantages of making a larger down payment:<\/p>\n And here are some disadvantages of making a larger down payment:<\/p>\n Now that we\u2019ve looked at typical down payments and reasons for putting down more as well as less, let\u2019s consider the minimum down payment you can make on a home. It\u2019s surprisingly low.<\/p>\n Here are minimum down payment requirements for the major types of mortgage loans<\/a>.<\/p>\n FHA loans, insured by the Federal Housing Administration, offer down payments as low as 3.5% for buyers with good credit who meet some other restrictions. Low-down-payment buyers will have to buy mortgage insurance for FHA loans.<\/p>\n If you put down 10% or more on your FHA loan, then your mortgage insurance will disappear when you reach 20% equity in your home. If you put down less than 10%, you\u2019ll carry that mortgage insurance through the lifetime of the loan.<\/p>\n Conventional loans may allow as little as 3% down for well-qualified first-time homebuyers. These are loans that are not backed by any government agencies, such as the FHA, but are offered by many lenders and then ultimately sold to either Fannie Mae or Freddie Mac.<\/p>\n Non-first-time homebuyers and slightly-less qualified buyers can also usually get a conventional loan with as little as 5% down. Borrowers putting down less than 20% have to carry mortgage insurance on the loan.<\/p>\n Fannie Mae HomeReady<\/a> is a special loan program for certain qualified borrowers where you can put as little as 3% down. If you qualify for the program, you may have to take a Homeowners\u2019 Education Course (for first-time homebuyers), and you will be required to pay for mortgage insurance.<\/p>\n VA loans for enlisted members of the military, veterans, or surviving spouses can be gotten with no down payment at all. And there\u2019s no mortgage insurance, although there is a one-time VA funding fee for all VA loans.<\/p>\n USDA loan programs also offer zero-down mortgages. These loans are only available for properties and buyers in areas that meet geographical and income restrictions.<\/p>\n In addition to these sources for low-down loans, there are many more places you can get help coming up with a down payment.<\/p>\n![\"A](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2021\/05\/how-much-to-set-aside-for-a-downpayment-3-666x381.png\")
<\/a>What\u2019s a down payment?<\/h2>\n
Loan-to-value, explained<\/h3>\n
Mortgage insurance<\/h3>\n
![\"a](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2021\/05\/how-much-to-set-aside-for-a-downpayment-2-666x381.png\")
<\/a>Do you really need 20% down?<\/h2>\n
Is making a large down payment worth it?<\/h3>\n
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How low can you go?<\/h2>\n
FHA loans<\/h3>\n
Conventional loans<\/h3>\n
Fannie Mae HomeReady loans<\/h3>\n
VA loans<\/h3>\n
USDA loans<\/h3>\n
![\"Two](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2021\/05\/how-much-to-set-aside-for-a-downpayment-4-666x381.png\")
<\/a>Down payment help when you need it<\/h2>\n