Coming up with a down payment can be one of the toughest parts of becoming a homeowner. Saving that much money while you’re already paying rent, making car payments, and covering other bills can be a struggle—even for those who are earning a good salary or who have two incomes to put together for a household.
As if the whole thing weren’t daunting enough, there’s still a generally accepted belief among buyers that they must put down 20% of a home’s value to get a mortgage.
You may have heard that 20% is the benchmark for a solid down payment—and that’s true. But it doesn’t make that number a must—or the norm. Some lenders will allow a qualified borrower to make a down payment as low as zero or 1% . With a credit score of at least 580, an FHA borrower can get a loan with a 3.5% down payment.
So, how much is an average down payment on a house? It varies, depending on things like, the type of buyer, loan program, location, and prices in a specific area. For example, first-time buyers programs usually require less money down than repeat buyers, who can often use the proceeds from a home sale to make a down payment on their next home.
According to Zillow’s 2018 Consumer Housing Trends Report, more than half of the buyers surveyed (52%) put less than 20% down. And younger buyers put down less than older buyers: 60% of Millennials put down less than 20% compared with 48% of Gen Xers, 43% of baby boomers, and 38% of Silent Generation buyers.
First-time buyers who financed their home typically put down 7%, according to the National Association of Realtors’ 2018 profile of Home Buyers and Sellers, while repeat buyers put down 16%.
Should You Aim for 20%?
So, the question isn’t necessarily whether you have to put 20% down to get a mortgage, it’s whether you should. Here are some things to consider:
If your down payment is 20%
If you can come up with enough to put down 20%, it could save you money on the total cost of the home mortgage.
Your loan terms may be better: When lenders are deciding whether to approve a mortgage and what the terms should be, they may look at several factors, including credit history, employment stability, income, debt to income ratio, and savings. They’ll also likely calculate the loan-to-value ratio, or what percentage of the home’s purchase price will be covered by the mortgage loan.
Mortgage lenders often provide better loan terms to borrowers who have loan-to-value ratios no higher than 80%, because they consider them to be a better risk. The fact that the buyers are putting more money toward the home is considered a sign of commitment.
You might not have to pay for mortgage insurance: If you put down 20% or more on a home with a conventional loan, you won’t be required to pay for private mortgage insurance (PMI), which is insurance that protects the lender’s interest in the loan if you stop making payments.
The cost of PMI is based on things like the loan amount, the borrower’s creditworthiness, and the percentage of a home’s value that would be paid out for a claim. Rates vary but generally range from 0.55% to 2.25% of the original loan amount—or $550 to $2,250 for every $100,000 borrowed.
That’s a lot of money you can leave off your house payment every month. (The FHA requires both upfront and annual mortgage insurance premiums (MIP ) for all borrowers, regardless of the amount of down payment.)
You could leave yourself short of money: If you’re feeling squeezed by the effort to save for a house, you may want to reconsider your timeline or the amount you’ll put down.
Potential mortgage lenders will likely want to look at your bank statements to see how much money you have, how long you’ve had it, and how you manage it. And once you’re making payments, you don’t want to fall behind on your mortgage (or any other bills) because you’ve run out of savings or have had to tap your emergency fund.
SoFi offers different multiple types of
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terms that suit you best.
If your down payment is less than 20%
There isn’t anything wrong with making a down payment that’s less than 20%—as noted above, most people do.
You can cancel the PMI later on: Under the Homeowners Protection Act , lenders are required to automatically cancel PMI when the loan balance gets to 78% LTV of the original value of the home. You also can ask your lender to cancel the PMI once you’ve paid down your loan to 80% of the home’s original value depending upon eligibility. Or, if the value of the home has increased, you may owe less than 80% of what it’s worth, which could qualify you to apply for cancellation of PMI on that mortgage.
You may be able to improve your loan terms if you have a good credit rating: If you can’t pull together 20% for a down payment, you can still help yourself by showing lenders that you’re a good risk. If you have a good job, a solid credit rating, and other positive factors, you may still qualify for a manageable interest rate or better terms.
You may want to take advantage of a good deal: Mortgage interest rates are lower than forecasters expected right now, and those savings could be an important factor in whether you leap or keep looking at homes until you have a bigger down payment. There are also predictions that we could be moving from a seller’s market to a buyer’s market.
If you find the home you want at the right price, you may want to crunch the numbers to see if it’s worth moving forward with a lower down payment. Keep in mind, though, that if you finance a higher amount, no matter how favorable the terms are that you negotiate, your payments will likely be higher.
Ways to Save
As you work your way toward that down payment—big or small—here are a few changes that could help you get there:
Figuring out how much you’ll need: Setting a goal can be a sound step toward making it a reality. A mortgage calculator can help you estimate how much you can borrow, play with different down payment options, and view different monthly mortgage payment options (how much your monthly mortgage payments will be).
Creating a realistic monthly budget: Paying down debt and budgeting for your monthly expenses could help put more toward your down payment and, later, make your payments on time when you get your home loan.
Reducing unnecessary costs: Think about expenses that could be eliminated temporarily (or forever) and start putting that money into your down payment savings account. Could you press pause on your premium cable channels, dinner out once a week, or your clothing subscription box? Every little bit can help.
Finding the right place to stash your down payment savings: If you haven’t already done so, you may want to open an online savings account to handle your down payment savings.
Making savings automatic: You may have the best intentions to save each month, but something is always bound to come up. Setting up an automatic plan can take away some of temptation and put savings on autopilot.
What SoFi Has to Offer
When you’re ready to move forward in your home buying journey, SoFi can help there, too. With a SoFi mortgage loan, you’ll find competitive rates and no hidden fees. You can put as little as 10% down, and you don’t have to worry about paying for PMI on our Jumbo loan programs.
Got the home-buying bug? Find out what a SoFi mortgage could mean for you.
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