How Much Down Payment Do You Need?
The down payment is often the biggest hurdle to homeownership. While the traditional advice is to put 20% down, there are many options available for buyers with less saved. Understanding the tradeoffs helps you make the right choice for your situation.
A larger down payment means a smaller loan, lower monthly payments, and no private mortgage insurance (PMI). But waiting years to save 20% in a rising market might cost you more than paying PMI for a few years.
Down Payment Options by Loan Type
| Loan Type | Minimum Down | Who It's For |
|---|---|---|
| Conventional | 3-5% | Good credit (620+), stable income |
| FHA | 3.5% | Lower credit okay (580+), first-timers |
| VA | 0% | Veterans, active military, spouses |
| USDA | 0% | Rural/suburban areas, income limits |
| Jumbo | 10-20% | Expensive homes above conforming limits |
First-Time Buyer Programs
The 20% Down Payment Myth
While 20% down is ideal, it's not required. Here's what matters:
Advantages of 20% Down
- No PMI — saves $100-300+/month on most loans
- Lower monthly payment due to smaller loan
- More equity from day one (protection against market dips)
- Better interest rates in many cases
- Stronger offer in competitive markets
When Less Than 20% Makes Sense
- Home prices are rising faster than you can save
- You have a stable income but limited savings
- You can get PMI removed relatively quickly
- The opportunity cost of waiting is high
- You have other financial priorities (emergency fund, debt)
Don't Drain Your Savings
Understanding PMI
Private Mortgage Insurance (PMI) protects the lender if you default on a conventional loan with less than 20% down. Here's what you need to know:
| Factor | Details |
|---|---|
| Cost | 0.5-1.5% of loan amount annually ($83-$250/month on $200K loan) |
| Duration | Until you reach 20% equity (can request at 20%, auto-drops at 22%) |
| Payment | Added to monthly mortgage payment |
| Tax deductible? | Sometimes — check current tax law |
How to Remove PMI
Closing Costs to Budget For
Beyond the down payment, expect to pay 2-5% of the home price in closing costs:
| Cost | Typical Amount | Notes |
|---|---|---|
| Loan origination | 0.5-1% of loan | Lender's processing fee |
| Appraisal | $300-600 | Required to verify home value |
| Home inspection | $300-500 | Optional but highly recommended |
| Title insurance | $1,000-2,500 | Protects against title issues |
| Attorney fees | $500-1,500 | Required in some states |
| Property taxes | 2-6 months | Prepaid into escrow |
| Homeowners insurance | 1 year | Prepaid first year's premium |
| Recording fees | $50-250 | Government fee to record deed |
On a $400,000 home, closing costs typically range from $8,000 to $20,000. Some of this can be negotiated or paid by the seller in certain markets.
Strategies to Save Faster
Automate Your Savings
Set up automatic transfers to a dedicated down payment fund on payday. You can't spend what you never see in your checking account.
Use a High-Yield Savings Account
Current HYSA rates of 4-5% APY can add thousands to your savings. On $50,000 over 2 years, that's $4,000-$5,000 in free interest.
Set Milestones
Break your goal into smaller milestones ($10K, $25K, $50K) and celebrate each one. Progress feels real when you can see it.
Find Extra Money
- Tax refunds (average refund is ~$3,000)
- Work bonuses and raises
- Side hustle income
- Selling unused items
- Cutting discretionary spending temporarily
Consider Gift Funds
Family gift funds are allowed for down payments on most loan types. FHA allows 100% gift for down payment; conventional loans have some restrictions.
How Much House Can You Afford?
Before focusing on the down payment, make sure you can afford the total monthly cost:
| Rule | Guideline |
|---|---|
| 28% Rule | Housing costs should be ≤28% of gross income |
| 36% Rule | Total debt payments ≤36% of gross income |
| Home Price | Generally 2-3× your annual income |
Example: With $100,000 household income, aim for housing costs under $2,333/month and home prices around $200,000-$300,000.
Don't Max Out
Frequently Asked Questions
Q: Is 10% down better than 3%?
A: Generally yes — you'll have lower PMI costs and a smaller loan. But if 10% takes years longer to save, run the numbers on total cost including home price appreciation in your area.
Q: Can I use my 401(k) for a down payment?
A: You can, but be careful. Some plans allow hardship withdrawals or loans for home purchases. Loans must be repaid; withdrawals may incur taxes and penalties. It could delay retirement.
Q: What about down payment assistance programs?
A: Many exist! State housing agencies, city programs, employer assistance, and non-profits offer grants, forgivable loans, and matched savings programs. Check HUD.gov for options in your area.
Q: Should I wait for 20% or buy now with 5%?
A: It depends on your market. In areas with 5%+ annual appreciation, waiting costs you money. Calculate: years to save 20% × annual appreciation × home price. That's your 'cost of waiting.'
Q: Do I need reserves after closing?
A: Yes! Lenders often require 2-6 months of payments in reserves. Plus you should have an emergency fund for unexpected repairs. Don't empty your accounts for the down payment.
Q: Can the seller pay my closing costs?
A: Yes, seller concessions are common. Conventional loans typically allow 3-9% seller contributions. In buyer's markets, this is a good negotiation tool.
Down Payment Checklist
- Determine your target home price based on affordability
- Choose a down payment percentage (consider PMI tradeoffs)
- Calculate total needed: down payment + closing costs + reserves
- Open a high-yield savings account for your down payment fund
- Set up automatic monthly transfers
- Research down payment assistance programs in your area
- Check your credit and work on improving it if needed
- Get pre-approved when you're about 6 months from your goal
This calculator provides estimates for planning purposes. Actual loan terms, PMI rates, and closing costs vary by lender and location. Consult a mortgage professional for accurate quotes and to explore all available programs.