Down Payments 101: How Much Do I Need to Save for a House?
What You'll Learn: How to decide how much to spend on a down payment — and how to save for one.
EXPECTED READ TIME: 8 MINUTES
When you’re saving for a house or shopping for one, you’ve got to factor in many costs. One of the most important ones is the down payment. Let’s take a look at how much you might need to save in order to feel confident going into the mortgage process.
What is a down payment?
A down payment on a mortgage is the initial payment you make when purchasing a property. It’s calculated as a percentage of the total purchase price that you pay upfront. The remaining balance is typically financed through a mortgage loan.
The money you put down represents your initial investment in your home. Lenders like to make borrowing decisions they feel confident about, and a large down payment helps suggest to them that you’re fully committed to the transaction. In return, a lender may offer you a lower mortgage interest rate.
How much will I need to save for a down payment?
Conventional wisdom is that you’ll need to pay at least 20% of the total purchase as a down payment. But that’s not the whole story. Lots of people put down way less:
- The average down payment on a primary residence in the first quarter of 2023 was actually 13%.
- In certain cases, you may even be able to get a mortgage with as little as 3% — or even nothing — down. For example, if you qualify for a VA loan or a USDA loan, which are backed by the federal government, there may be no minimum down payment required.
IMPORTANT: If your down payment is less than 20% of your home’s price, you will likely need to pay for mortgage insurance, which adds to your monthly costs. So you may need to reduce your target home price if you plan to put less than 20% down.
The minimum down payment required can vary depending on many factors, including the type of loan you’re applying for, your credit score, and your lender's requirements.
What are the advantages of making a higher down payment?
They can include:
- Lower loan amount: A larger down payment reduces the loan amount, which means lower monthly mortgage payments.
- Equity and ownership: A down payment creates instant equity, giving you an ownership stake in your property.
- Better loan terms: A higher down payment often leads to more favorable loan terms, including lower interest rates and reduced mortgage insurance premiums.
- No private mortgage insurance (PMI): If your down payment is less than 20% of your home’s price, you will likely need to pay for mortgage insurance, which adds to your monthly costs.
What are the main mortgage loan options and the down payments required for each?
- Conventional loans. (“Conventional” just means that the loan is not part of a specific government program.) To get the best interest rate, you’ll typically need a down payment of 20%. With that amount down, there's no mortgage insurance. Keep in mind that there are other conventional mortgage programs where a borrower can purchase a home with less than 20%.
For those that qualify, government loans from programs like those listed below have more flexible down payment options than conventional loans.
- Federal Housing Administration (FHA) loans offer loans with down payments as low as 3.5%. They focus on first-time home buyers and those with low- to moderate-incomes. The definition of first-time homebuyer includes someone who has not owned a home for a three-year period, a single person who previously owned a home with a spouse, and a person who previously owned a mobile home.
- VA loans from the U.S. Department of Veteran’s Affairs offer home loans with no down payment for current and retired military members, those that have completed service in the National Guard or are the surviving spouse of a veteran. VA loans also have no private mortgage insurance (PMI).
Other costs to consider
In addition to your down payment, you’ll be responsible for paying these costs when your loan closes. That’s why they’re sometimes called closing costs. It’s wise to bear these in mind when you’re shopping for a new mortgage:
- Mortgage insurance. This is a monthly cost that’s typically required for borrowers who make a down payment of less than 20%.
- Origination and lender charges. These costs are charged by the lender for “originating,” or making you the loan.
- Points. Points are a charge you pay upfront to the lender. They are calculated as a percentage of the loan amount. You can choose whether or not to pay points. Learn more about points.
- Third-party closing costs. These are charges for third-party services that are required to get a mortgage, such as appraisals and title insurance.
- Taxes and government fees. These fees are charged by your local government.
- Prepaid expenses and deposits. These expenses may be associated with your loan or with homeownership.
How to save for a down payment and other expenses
Saving up for a down payment on a home may seem like a super big hill to climb, but with a little patience and discipline, you can find ways to put away money for a modest down payment. And remember, you don’t have to save up 20%. Even if you’re only able to put away 5% of the sale price of your home, you’ll be in a better position than you’d be with nothing to put down. Here are good ways to get started:
- Make a budget: Track your expenses and identify areas where you can save.
- Automate your savings: Set up automatic transfers from your checking account to a dedicated savings account.
- Down payment assistance programs: Research local, state, and national programs that provide financial assistance to homebuyers.
- Gifted down payments: In some cases, buyers may receive a down payment as a gift from a loved one. Lenders usually have specific guidelines regarding the use of gifted funds, so make sure you understand the requirements.
Help for first-time homebuyers
Seek out first-time homebuyer programs that aim to make homeownership possible for first-time homebuyers of all income levels. Some are based on income, some are based on location, and others are based on commitments to serving particular groups of people, such as veterans.
Other considerations
Remember that mortgage down payment requirements and guidelines can vary based on location, loan type, and individual lender policies. It’s smart to consult with a mortgage professional or financial advisor who can provide personalized advice based on your specific situation, goals, and needs.
What’s the right choice for you?
In the end, the down payment you make will depend upon how much you have in savings and what other things you might need that money for. It’s okay to go with 20% down, and it’s also, in certain circumstances, okay to put down less or more.
Get started by thinking about your financial circumstances and goals, and that will help you see what makes the most sense for you and your loved ones. Happy shopping!