Homebuying 101: What People Don’t Understand About Down Payments

Young man is signing financial mortgage contract of sale for a new house with real estate agent at office.
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One of the mysteries surrounding buying a home is just how large your down payment should be. In reality, there’s no one correct answer, and this can cause confusion for new homebuyers. In fact, in a recent survey by GOBankingRates, 20% of respondents said you only need 10% down to buy a house, but 7% said you need 30% and more than 22% thought that it varies depending on the type of the loan. 

Standard wisdom for years has been that homebuyers should put down 20%, but that isn’t actually some type of industry mandate. Although some realtors or lenders may tell you that you need to put down 20% — and in many cases, that may be appropriate — it’s not as if you can’t legally buy a house unless you pony up that much cash. But how much do you actually need to put down on a house? Read on to learn more.

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What Are the Requirements for Each Type of Loan?

While there are no “rules” for how much you need to put down on a house, there are minimums that certain loan types require — and individual lenders are free to request whatever down payment they wish. For example, if you qualify for a VA or USDA loan due to your affiliation with the military, you may be able to get a loan with 0% down. FHA loans, which are generally extended to those with lower credit scores, can be had with a down payment as low as 3.5%. Most conventional loans, including adjustable-rate loans, require at least 5% down, although some lenders may go down as low as 3%.

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Why Is 20% a Popular Suggested Down Payment?

Probably the most important reason why 20% is often suggested as a down payment is that it allows you to avoid private mortgage insurance, commonly referred to as PMI. Private mortgage insurance helps protect lenders against default, as statistically speaking, a smaller down payment makes default more likely.

PMI will raise the cost of your mortgage by a not-insignificant amount, commonly 0.5% to 1.5% of your loan amount per year. On a $300,000 loan, this means your PMI will add somewhere between $125 to $375 per month to your mortgage payment. Not only might that be enough to make a home unaffordable for you, but it’s also money that is essentially going right down the drain. While your mortgage payment itself will actually help you build equity in your home, your PMI just lines the pocket of the insurance company. 

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Another reason many suggest that you put 20% down on a home is that it’s likely to prevent you from being “upside down” on your loan, or owing more than the home is worth. If you put down 5% and your home value falls 10%, for example, the value of your home will be less than the size of your mortgage. But if you put down 20% instead, you’ll still have equity in your home.

What Are the Cons of Putting 20% Down?

Although putting 20% down on a home is considered to be a conservative option, there are some potential drawbacks as well. The first is that it can take quite a long time to save enough for a 20% down payment. If you’re looking at a $400,000 home, for example, you’ll need to save $80,000 just for the down payment. Depending on your income and saving habits, this could take years. If you only put 5% down instead, you’d only have to come up with $20,000. This could move you into a home sooner, getting you away from renting and potentially benefiting from home price appreciation years earlier.

Another drawback of putting up so much money is that it’s essentially “lost” to you. Although your down payment will become equity in your home, actually using that money is difficult. To draw it back out, you’ll either have to sell your home, take out some type of home equity loan or line of credit or pull cash out through refinancing. All of these options take time, and some may reduce or damage the equity in your home. If you instead put a smaller amount of money down, you can use that excess money for other investments, such as the stock market, while still owning a home.

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What Should You Do?

The first thing you should realize is that there is no “wrong” answer when it comes to how much you put down on your house. Each person’s financial situation and goals are different, so the decision you make should be the best for you, not something in accordance with generic advice. Ideally, if you can put down 20%, it’s the most conservative option and avoids PMI. But you don’t “need” to put down 20%, and in some cases, it may be better financially if you don’t. It’s always a good idea to consult with a financial advisor to help you determine the best options for you personally.

More From GOBankingRates

Methodology: GOBankingRates surveyed 1,056 Americans aged 18 and older from across the country on between March 17 and March 20, 2023, asking twelve different questions: (1) When you were growing up, which financial topics did your parents talk to you about? (Select all that apply); (2) At what age did you become comfortable with basic money skills (i.e., writing a check, balancing your accounts, budgeting)?; (3) At what age did you start saving and planning for retirement?; (4) How much cash do you think you should have on hand in case of a national emergency?; (5) Do you think a lack of financial understanding has impacted your ability to be financially prepared for the future?; (6) How much did a lack of financial literacy cost you in the last year due to things like not knowing the best way to save for retirement, not being comfortable with investing, not using a budget, etc.?; (7) Which major financial task is most confusing to you?; (8) What percentage do you think you are required to put down on a home when buying?; (9) Do you feel prepared to handle any possible cuts to Social Security benefits?; (10) How has inflation changed how you handle your finances? (Select all that apply); (11) What’s the minimum you think experts would recommend you have saved to be comfortable in retirement?; and (12) Which of the following do you find most confusing about Social Security?. GOBankingRates used PureSpectrum’s survey platform to conduct the poll.

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About the Author

After earning a B.A. in English with a Specialization in Business from UCLA, John Csiszar worked in the financial services industry as a registered representative for 18 years. Along the way, Csiszar earned both Certified Financial Planner and Registered Investment Adviser designations, in addition to being licensed as a life agent, while working for both a major Wall Street wirehouse and for his own investment advisory firm. During his time as an advisor, Csiszar managed over $100 million in client assets while providing individualized investment plans for hundreds of clients.
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