Traditionally, you needed to have a down payment of between 10% and 20% of your home costs saved up before you purchased a home. Mortgage lenders tried to protect themselves by having those standards, because it indicated that you likely would be more responsible with their money. It also protected them because they did not loan out the full value of your home. If you were to default on the loan, they were more likely to make a full recovery from the loss.
In recent years, however, things have changed. It is now possible to purchase your home with no down payment at all. That may sound like good news, but there is reason to be cautious.
Key Takeaways
- It's possible to buy a home without a down payment (or with a very small one), but it comes with risks.
- When you don't have 20% to put down, you usually have to have private mortgage insurance (PMI) in some form.
- If you buy without a down payment when home prices are at their peak, you may owe more than your home is worth if the housing market drops.
- A down payment can increase the size of home you can afford, and it can help you buy one in a better location.
Avoiding the Down Payment
In 2021, some banks offered near 100% financing for a home, with a 3% down payment being a widely advertised mortgage option. Certain couples may also qualify for an FHA loan, which eliminates the need for a large down payment. Banks also offer mortgages with easier qualifications, but this might not be the best option due to higher interest rates and closing costs.
When you don't have 20% to put down, you usually have to pay private mortgage insurance (PMI) in some form. But some people have even taken out two loans in order to avoid the cost of PMI—and still not have a down payment on their home.
The best way to avoid these costs, however, is to save up for a down payment for your home if possible. This is a better approach for several reasons.
Reasons to Have a Down Payment
First and foremost, a down payment proves that you are financially ready and responsible enough to buy a home. When you purchase a home, you are responsible for all of the maintenance costs related to it. You will need to pay for repairs and homeowners insurance. Saving up for a down payment proves to yourself and the bank that you are in a position to make those sacrifices. In many cases, your mortgage will be higher than the rent you're paying, so your ability to save demonstrates that you are ready for the increase.
Another reason to have a down payment is that it protects you in case you need to move, and the housing market has dropped. Many people can't sell their home because they bought them without a down payment when housing prices were at their peak, and now they owe more than their home is worth. There is no pretty way out of that situation. Either you will lose lots of money or you will ruin your credit—or you will do both.
Many people in that situation hang onto their homes, hoping that the circ*mstances will improve. Using a down payment does not completely prevent that from happening to you, but it does give you a solid buffer against a downturn. Unless your home value falls more than 20%, you are much better off, since you started with some equity.
Avoid Buyer's Remorse
Making a down payment on a home helps avoid any regret of buying your home. In addition to showing that you are financially prepared to purchase a home, saving up for a down payment will allow you to purchase a home that you will like and not regret buying.
Note
The down payment can increase the size of home you can afford, and it can help you buy one in a better location. Essentially, it gives you more choices,because you will still qualify for the same amount on your mortgage; the down payment is just extra money that can increase your purchasing power.
When and How to Buy
When mortgage rates are low, you may be feeling the pressure to purchase right away, even if you don't have a down payment, so that you can save money in interest over the life of your loan. But before jumping into a major financial commitment, be sure you can handle it. Use our mortgage payment calculator to see the real costs of buying a home without a down payment.
When you do decide you are ready to purchase a home, you will need to make sure that you choose the best mortgage with a fixed interest rate. An adjustable-rate mortgage will cause your mortgage payments to go up as the interest rate increases. Finally, be sure you have some money saved for home repairs. That will ensure you're that ready for the unpredictable costs of home ownership.
FAQs
Putting money down on a house also helps lower your total loan amount. The less money you borrow, the more money you save on interest over the life of the loan. A larger down payment may help you purchase a higher-priced home or get a lower interest rate.
How important is a down payment on a house? ›
A down payment on a house also protects you as the buyer. If you want to sell your home and the market drops, you might owe more on your property than it's worth. If you made a larger down payment when you purchased your house you may break even, or possibly make money when you sell.
What is the goal for a down payment on a house? ›
Know Your Down Payment Amount
Aspiring buyers typically ask, “Is it best to put 20% down on a house?” This is a laudable goal as a minimum 20% down payment waives private mortgage insurance (PMI) on conventional loans. However, eligible borrowers can put down as little as 3% but pay additional fees.
Why do you think you would need a down payment? ›
Having more set aside for a down payment makes borrowers more attractive to mortgage lenders, so it can earn you a lower interest rate and fewer fees. If you have 20% available, you can likely avoid mortgage insurance. A bigger down payment also means you'll own more equity in the home right away.
Is $50,000 a good down payment for a house? ›
The average down payment for a house in California typically ranges between 15% to 20% of the purchase price, but can vary depending on your mortgage lender and financial situation. For example, if you purchase a $1,500,000 home in La Jolla, expect to make a down payment of at least $225,000 to $300,000 on average.
Is it bad to not put a down payment on a house? ›
A bigger loan: Putting down less upfront means borrowing more to make the purchase, which makes for higher monthly payments and more interest paid over time.
Are down payments worth it? ›
A down payment may help you to more easily qualify for an auto loan, especially if you have lower credit scores. Without a down payment, the lender has more to lose if you don't repay the loan and they need to repossess and sell the car. Cars can begin losing value as soon as you drive off the lot.
Why do sellers care about down payment? ›
A large down payment gives the seller more confidence in accepting your offer because it shows them some evidence that you're financially prepared to make the purchase.
Is $20,000 enough for a down payment on a house? ›
Aim for a down payment that's 20% or more of the total home price—that's $40,000 for a $200,000 house. This minimum is partially based on guidelines set by government-sponsored companies like Fannie Mae and Freddie Mac.
What credit score do I need to buy a house with no money down? ›
A USDA loan is insured by the U.S. Department of Agriculture and is meant for low- to moderate-income home buyers. The USDA doesn't require a down payment and doesn't set a minimum credit score requirement, though most lenders will want borrowers to have at least a 640.
First-time buyers can qualify for a variety of down payment assistance loans. Many charities and local government programs offer them, with varying requirements, but in general you'll need to be low income and buying your first property to qualify.
Is $100,000 a good down payment on a house? ›
It's an ok down payment. A GOOD down payment would be 20% of the purchase price of the home in this case at $350,000 that would be $70,000. If you put a 20% down payment on a home then you do not have to pay for a private mortgage insurance (PMI) EVERY SINGLE MONTH.
How much do most people put down on a house? ›
How Much Is The Average Down Payment On A House? The average first-time buyer pays about 6% of the home price for their down payment, while repeat buyers put down 17%, according to data from the National Association of REALTORS® in late 2022. The median home sale price in the U.S. was $416,100 as of Q2 in 2023.
How much house can I afford if I make $70,000 a year? ›
One rule of thumb is that the cost of your home should not exceed three times your income. On a salary of $70k, that would be $210,000. This is only one way to estimate your budget, however, and it assumes that you don't have a lot of other debts.
Can I afford a 500K house on 100K salary? ›
To afford a $500,000 house, you need to make a minimum of $91,008 a year — and probably more to make sure you're not house-poor and can afford day-to-day expenses, maintenance and other debt, like student loans or car payments. One good guideline to follow is not to spend more than 28 percent of your income on housing.
What is the biggest negative when using down payment assistance? ›
Down payment assistance may allow you to purchase a more expensive home, but it could add financial stress down the road. Closing could take longer. Down payment assistance adds an extra step to the mortgage process. This could push the closing date further out than it would have been without assistance.
How much of a down payment do I need for a $300,000 house? ›
The down payment needed for a $300,000 house can range from 3% to 20% of the purchase price, which means you'd need to save between $9,000 and $60,000. If you get a conventional loan, that is. You'll need $10,500, or 3.5% of the home price, with a FHA loan.
How can I avoid a downpayment on my house? ›
The easiest way to avoid a down payment is to qualify for one of the two no-down payment mortgage programs backed by the government: a USDA or a VA loan.
Is it necessary to have a 20% down payment? ›
Although putting down 20% to avoid mortgage insurance is wise if affordable, it's a myth that this is always necessary. In fact, most people opt for a much lower down payment. Choosing a smaller down payment over becoming “house poor” from a 20% down payment is often the better choice.
