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, and 20% isn’t the typical down payment on a house.
As of late, the median down payment on a house is 6%, according to Attom Data Solutions, a real estate data provider. The National Association of Realtors® puts the median down at 12%. Even that is a significant chunk of change: $18,000 to $36,000 on a home selling for $300,000.
But a down payment may be lower than those stats. The minimum down required for a conventional home loan—a non government-backed loan—is 3%, for example. Some government home loans allow for 3.5% or even 0% down.
A first-time buyer, and others, may want to know of any downsides of putting less than 20% down on a house.
Read on for that answer, but perhaps start with a home affordability calculator to get a feel for how much you’ll need to put down and other expenses.
Should You Aim for 20% Down?
The question isn’t whether you have to put 20% down to get a mortgage. It’s whether you might want to. Here are some things to consider:
If Your Down Payment Is at Least 20%
If you can come up with enough to put down 20%, it could save you money on the total cost of the mortgage. Also:
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 were to 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 a year for every $100,000 borrowed. (Freddie Mac, the public government-sponsored enterprise, says to count on, in general, about $30 to $70 per month for every $100,000 borrowed.)
(FHA loans require both an upfront mortgage insurance premium (MIP) and an annual MIP that will last for 11 years or the life of the loan, depending on the loan term, regardless of the down payment amount.)
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 credit history, employment stability, income, debt to income ratio, and savings.
They’ll also likely calculate the loan-to-value (LTV) ratio, or what percentage of the home’s purchase price will be covered by the mortgage loan.
Lenders often provide better loan terms to borrowers who have an LTV ratio 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.
SoFi offers different multiple types of
mortgages so you can choose the
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, most people do.
You can cancel 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 PMI once you’ve paid down your loan to 80% of the home’s original value, depending upon eligibility.
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 low rates: Mortgage interest rates could affect whether you take the leap or keep looking at homes until you have a bigger down payment.
Keep in mind that the higher the amount you finance, no matter how favorable the terms are that you negotiate, the higher your payments will likely be.
You may be able to tap a special program: Various city, county, and state down payment assistance programs are out there. They may take the form of grants or second mortgages, some with deferred payments or a forgivable balance.
Ways to Save for a Down Payment
As you’re Googling “How much down payment for a house?” late into the night, here are some changes that could help you work your way toward a down payment.
Figure 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 monthly mortgage payment options.
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: Find expenses that could be eliminated and think about putting that money into your down payment savings account. Could you live with fewer or no premium cable channels, less eating out, or your clothing subscription box? Every little bit can help.
Finding a place to stash your down payment savings: If you haven’t already done so, you may want to open an online 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 the temptation and put savings on autopilot.
Recommended: Guide to Buying, Selling, and Updating Your Home
What is the average down payment on a house? It’s south of 20%, which usually means private mortgage insurance and higher payments. But if all you can muster is less than 20% down on a house, you’re in good company, and paying a monthly insurance premium may be worth the ability to secure a mortgage at a low interest rate.
If you’re getting serious about buying a home, SoFi can help.
SoFi fixed-rate mortgage loans require a downpayment well under 20% for qualified borrowers.
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