What Is a Mortgage Down Payment?

FT Contributor
A tiny model house sits on top of a calculator and next to a sign that reads "down payment."

A down payment is the money you put down when you take on a loan. The down payment you provide to a lender directly reduces the loan amount you owe, making it easier for you to pay off the loan. In most cases, when you apply for a home loan, you’re asked to provide a minimum down payment that’s usually a percentage of the loan amount.

The larger the down payment you provide for your mortgage, the better it can be for you financially over the long term. A bigger down payment means a smaller loan amount, so you’ll pay less interest and have a more affordable monthly payment for your mortgage.

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How Much Should Your Down Payment Be?

When deciding whether to make a small or large down payment, there are many factors to consider. If you make a large down payment, you may be able to afford more house, since your monthly payments will be lower. With a large down payment, you’ll also pay less interest throughout the life of the loan since your loan amount will be lower.

It’s important to review your financial situation and your current debt-to-income ratio when deciding how much to put down for your mortgage. In most cases, you’ll need to take money from your savings account to provide a down payment for your mortgage. Then, you’ll be tasked with building your savings account back up after you close on the loan. If you’re getting a mortgage on a fixed income, it can be hard to save a lump sum of money for your down payment. Analyze your own situation and only put down what you can afford while maintaining financial stability.

Can You Buy a House Without a Down Payment?

Most mortgage lenders require down payments since this payment shows that you’re invested in the property you’re purchasing and are less likely to default on the loan. If you find a lender that doesn’t require a down payment, you may be required to purchase private mortgage insurance (PMI), which is an additional fee you’re responsible for paying.

PMI is generally required if you pay less than 20% of the home’s purchase price as your down payment. It insures the mortgage for the lender in case you default on the loan.

If you’re willing to pay PMI on your loan, you can generally find loans that require low or no down payment, including:

  • FHA loans: Generally require a 3.5% down payment.
  • VA loans: Require a down payment of 10% or the borrower is responsible for paying a funding fee, which can vary.
  • USDA loans: No down payment required, but you may need to save for closing costs.
  • Conventional loans: Down payment requirements vary by lender but are usually 5% to 20%.

If you can provide a down payment that’s at least 20% of the loan amount, you won’t be responsible for paying PMI. When you’re pre-approved for a mortgage, you can begin to calculate your potential down payment so you know how much you may need to provide to the lender when closing on your home.

What Is the Average Down Payment on a House?

The average down payment for a loan is 3% to 20%, depending on the type of loan you apply for and the lender’s requirements. In 2017, the median down payment for home buyers was 10% across all loan types. Once you have 20% equity in your home, you’re no longer responsible for PMI. Therefore, it may be beneficial to provide a 20% down payment to eliminate the need to pay for PMI.

Your down payment can help you build equity in your home since you’re paying down some of the purchase price upfront. When you build equity, you can take out a second mortgage on this equity if you need cash in the future. A higher down payment means you’ll have a lower monthly payment since your loan amount is less. When you have more money to put down, you also have more borrowing power since you’re taking on less debt with a lower loan amount.

Before you empty out your savings account for a down payment, consider the downfalls of providing a large down payment for your mortgage. You’ll no longer have the cushion of your emergency fund or savings account if you need to use it to provide your down payment.

If the home you’re purchasing needs improvements or repairs, you may have trouble paying for them if your money is tied up in a hefty down payment. Other important priorities, such as your retirement fund or investments, may also suffer if you put down a large down payment for your home.

Down Payment Assistance

Down payment assistance programs are offered throughout the country. Each state’s financing agency provides different down payment assistance programs to residents in need. In most cases, applicants must meet specific qualifications for different programs, such as being a first-time home buyer. There may also be down payment assistance programs for single parents or grants available for police officers or teachers who meet program qualifications.

If you qualify for a down payment assistance program in your area, you’re provided with money for your down payment. This makes it easier to afford your home and can lower your monthly mortgage payment. However, it’s important to understand the program requirements. If you don’t follow the program guidelines, you could be required to pay back the down payment. Some down payment assistance programs require you to:

  • Purchase a home in a specific location.
  • Contribute some of your own money for the down payment.
  • Meet specific income limits.
  • Stay below a certain purchase price.

A down payment may be required by your lender when you apply for a mortgage. However, even if your lender doesn’t require a down payment, you should consider providing one. If you can afford a down payment on your mortgage, it will lower your loan amount, allow you to build equity quickly, and make your monthly payments more affordable.

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