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Saving for a down payment can be one of the biggest hurdles for most Americans looking to buy a home. The down payment amount, which is the payment made upfront toward the home's purchase price, often requires a significant sum of money that many buyers struggle to accumulate in their savings account. For many, coming up with this payment means sacrificing other financial goals or delaying the opportunity to own a home sooner. The challenge is compounded by the many costs involved in home buying, including closing costs and moving costs, making it difficult for buyers to save enough money. Additionally, lenders require a minimum down payment depending on the loan type, such as conventional loans, FHA loans, or VA loans, which can vary but still represent a substantial payment amount. This upfront payment reduces the loan amount and monthly payments but can feel overwhelming for first-time home buyers who may have limited income levels or face competing financial priorities. As a result, saving for a down payment remains a significant barrier to homeownership for many Americans.
A down payment is the cash a buyer pays upfront toward the total purchase price when making a large purchase, such as a home. This initial payment reduces the loan amount you need to borrow from a mortgage lender and represents your first ownership stake in the property. Down payments are usually expressed as a percentage of the home's purchase price. For example, a 10% down payment on a $350,000 home would be $35,000 paid upfront, with the remaining $315,000 financed through a home loan.
Lenders require a minimum mortgage down payment for most loans, which helps lower their risk and shows that the buyer is financially committed. While conventional loans often require a higher down payment, some government-backed loans like FHA loans or VA loans may allow for a lower or even zero down payment. Making a larger down payment can help you qualify for a better interest rate, avoid private mortgage insurance, and result in smaller monthly mortgage payments, ultimately helping you save money over the life of your loan.
You may have heard the common myth that you need to put 20% down on a home to buy it, but that’s not necessarily true. While a 20% down payment is often cited as the standard, especially to avoid private mortgage insurance (PMI) on conventional loans, many buyers successfully purchase homes with much smaller down payment amounts. In fact, the minimum down payment required depends on the type of loan and lender’s risk preferences.
For example, in 2023, the typical down payment for first-time homebuyers was just 8%, according to the National Association of Realtors. Repeat buyers averaged around 19%, but these amounts vary widely depending on individual financial situations. Government-backed loans like FHA loans and VA loans allow for lower or even zero down payments, helping buyers qualify for home loans with less upfront cash.
Putting down less than 20% does mean you might pay private mortgage insurance or a slightly higher interest rate, but it also allows you to buy a home sooner and avoid the challenge of saving a large sum. Ultimately, the right down payment amount depends on your credit score, lender requirements, and financial goals. Understanding that a 20% down payment is not a requirement can help you explore more options and make more sense of your home buying journey.
The minimum down payment required for a house varies depending on the type of mortgage you plan to apply for to purchase a home. Understanding these requirements can help you determine how much money you'll need upfront and how it affects your loan amount, interest rate, and monthly payments.
VA loans, guaranteed by the U.S. Department of Veterans Affairs, require no down payment. These loans are available to current and veteran military service members and eligible surviving spouses. For example, if you purchase a $300,000 home using a VA loan, you can finance the entire purchase price without any money paid upfront, resulting in smaller monthly payments and no private mortgage insurance (PMI).
Similarly, USDA loans, backed by the U.S. Department of Agriculture's Rural Development program, also offer 0% down payment options for eligible rural and suburban homebuyers who meet income limits. For instance, buying a $250,000 home in a qualifying rural area with a USDA loan means you pay no down payment, helping you avoid PMI and keep more cash on hand.
Some conventional mortgages, such as Fannie Mae's HomeReady and Freddie Mac's Home Possible programs, allow down payments as low as 3%, provided you meet certain income limits. For example, if you buy a $400,000 home with a conventional loan requiring 3% down, you would pay $12,000 upfront. This larger down payment amount compared to zero helps you qualify for a lower interest rate and avoid paying more interest over time.
FHA loans, insured by the Federal Housing Administration, require a minimum down payment of 3.5% if your credit score is at least 580. For example, purchasing a $350,000 home with an FHA loan at 3.5% down means an upfront payment of $12,250. If your credit score falls between 500 and 579, the required down payment increases to 10%, which would be $35,000 on the same home price. FHA loans generally require mortgage insurance premiums, which can affect your monthly payments.
Jumbo loans exceed the conforming loan limits set by government-sponsored enterprises and often require higher down payments due to increased lender risk. Down payments typically range from 5% to 10%. For example, if you purchase a $1,000,000 home with a jumbo loan requiring 10% down, you would need to pay $100,000 upfront. A higher down payment can help you secure a better interest rate and avoid private mortgage insurance, leading to smaller monthly payments.
With low- or no-down-payment loans, you usually pay for the guarantee through fees or mortgage insurance, depending on the program. Choosing the right down payment amount can help you save money on interest paid over the life of your loan and enjoy other benefits like avoiding PMI and qualifying for a lower interest rate.
Saving enough money for a larger down payment can take time, but it offers significant benefits for homebuyers. A larger down payment reduces the loan amount you need to borrow from your mortgage lender, which can lead to a lower interest rate on your home loan. This means you pay less interest over the life of the loan, saving you money in the long run.
Additionally, making a higher down payment increases your home equity right away, giving you more ownership stake in your property from the start. This equity can be valuable if you want to access funds later through a home equity loan or line of credit.
A larger down payment also results in smaller monthly mortgage payments, making it easier to manage your monthly budget. Plus, by putting down at least 20%, many homebuyers can avoid private mortgage insurance (PMI), which is an extra monthly cost required on conventional loans with lower down payments.
Overall, a higher down payment reduces the lender's risk, often qualifying you for better mortgage terms and a better interest rate. While saving for a larger down payment may delay purchasing a home, the benefits of lower monthly payments, reduced interest paid, and increased equity make it a smart financial decision for many buyers.
The right down payment amount depends on your individual financial goals and situation. While a larger down payment offers many benefits, such as lowering your loan amount and qualifying for a better interest rate, putting down too much could leave you with less cash for other important expenses after closing.
Conventional loans often require you to pay private mortgage insurance (PMI) if your down payment is less than 20%. However, you can usually request to cancel PMI once you have more than 20% equity in your home. Making a higher down payment not only helps you avoid PMI but also results in smaller monthly mortgage payments and less interest paid over the life of your loan.
On the other hand, putting down the minimum down payment required by your mortgage lender—such as 3% for some conventional loans or 3.5% for FHA loans—can help you buy a home sooner and keep more money in your savings account for moving costs or emergencies. It’s important to balance the benefits of a larger down payment with your need for liquidity and other financial priorities.
Using a real estate agent can help you explore different loan options and down payment assistance programs, so you can determine how much house you can afford and what down payment amount makes the most sense for your unique situation. Trying out different down payment scenarios can help you understand how changing the down payment amount affects your mortgage payment, interest rate, and overall homeownership costs.
When deciding on your down payment amount, it's important to consider several factors beyond just the mortgage payment. Here are some key considerations that can help you plan effectively:
By weighing these considerations, you can choose a down payment amount that balances your financial readiness with your homeownership goals, helping you save money on interest paid and avoid unnecessary costs like private mortgage insurance.
When you buy a house, the down payment is paid on closing day — the day that you actually transfer money and get the keys to your new home. Your down payment will make up the largest chunk of that money, along with other closing costs. Because it's a substantial sum, closing costs are usually paid via a wire transfer or cashier's check.
A down payment allows you to make a large purchase, like buying a house, without having to pay all of the money at once. Instead, you pay a percentage of the purchase price upfront and borrow the rest. The loan balance is repaid over time, spreading the cost into manageable monthly payments.
Orion's brokers know that their clients don't need a 20% down payment to buy a home. Our brokers also know that a down payment is one of the largest obstacles to otherwise eligible home buyers. Consumers are using credit and financing in new and different ways to navigate their financial lives. Many consumers prefer to have more savings when they buy even at the expensive of home equity. 0%down can be a good option for some buyers that have reserves.
The first thing Orion's AEs hear their brokers explain to borrowers is that, when looking at resources, there are really two different types of home buying assistance: grants to help with a down payment or closing costs, and programs that give you an actual discount on the property or loan. Many consumers do not know what options exist for mortgage products or assistance. Orion is hearing more and more about tradeoffs between home equity versus liquidity. More data should also be helpful as we look at credit risk and collateral value in the future. The models are improving. And we will educate our clients regarding down payment assistance programs so that you can discuss them with your home buyers.
One explanation why first-time homebuyers are not finding homes is thought to be the competitive landscape. Lack of supply, combined with increased participation from cash and iBuyers, means fewer options for first-time homebuyers. As we move into2025, bidding wars are common in some markets, at some price levels. It could mean more cash and iBuyers winning homes outright or before financed offers could jump in. Some markets are slowing overall but would be interesting to see how shifts in the industry change indicators like this.
On the other hand, Orion's management believes that it could mean that with the flattening of mortgage rates that home values are normalizing. “Right priced” properties do not need to be bid up. As data sources increase, one wonders if easier access to real estate data will improve competition. For instance, fewer bidding wars could mean more accurate pricing, or it could mean that computers bid on properties so quickly that financed buyers missed out altogether. How can a buyer compete with an investor's supercomputer.
This trend will be one to watch for anyone focused on housing demand or real estate market data. Orion has many programs where buyers are only required to put down 10 or 5 percent, or even less. And through it all, Orion's AEs continue to be there for our broker clients!
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