Traditionally, you needed to have a down payment of between 10% and 20% of your home costs saved up before you purchased a home. Mortgage lenders tried to protect themselves by having those standards, because it indicated that you likely would be more responsible with their money. It also protected them because they did not loan out the full value of your home. If you were to default on the loan, they were more likely to make a full recovery from the loss.
In recent years, however, things have changed. It is now possible to purchase your home with no down payment at all. That may sound like good news, but there is reason to be cautious.
Key Takeaways
- It's possible to buy a home without a down payment (or with a very small one), but it comes with risks.
- When you don't have 20% to put down, you usually have to have private mortgage insurance (PMI) in some form.
- If you buy without a down payment when home prices are at their peak, you may owe more than your home is worth if the housing market drops.
- A down payment can increase the size of home you can afford, and it can help you buy one in a better location.
Avoiding the Down Payment
In 2021, some banks offered near 100% financing for a home, with a 3% down payment being a widely advertised mortgage option. Certain couples may also qualify for an FHA loan, which eliminates the need for a large down payment. Banks also offer mortgages with easier qualifications, but this might not be the best option due to higher interest rates and closing costs.
When you don't have 20% to put down, you usually have to pay private mortgage insurance (PMI) in some form. But some people have even taken out two loans in order to avoid the cost of PMI—and still not have a down payment on their home.
The best way to avoid these costs, however, is to save up for a down payment for your home if possible. This is a better approach for several reasons.
Reasons to Have a Down Payment
First and foremost, a down payment proves that you are financially ready and responsible enough to buy a home. When you purchase a home, you are responsible for all of the maintenance costs related to it. You will need to pay for repairs and homeowners insurance. Saving up for a down payment proves to yourself and the bank that you are in a position to make those sacrifices. In many cases, your mortgage will be higher than the rent you're paying, so your ability to save demonstrates that you are ready for the increase.
Another reason to have a down payment is that it protects you in case you need to move, and the housing market has dropped. Many people can't sell their home because they bought them without a down payment when housing prices were at their peak, and now they owe more than their home is worth. There is no pretty way out of that situation. Either you will lose lots of money or you will ruin your credit—or you will do both.
Many people in that situation hang onto their homes, hoping that the circ*mstances will improve. Using a down payment does not completely prevent that from happening to you, but it does give you a solid buffer against a downturn. Unless your home value falls more than 20%, you are much better off, since you started with some equity.
Avoid Buyer's Remorse
Making a down payment on a home helps avoid any regret of buying your home. In addition to showing that you are financially prepared to purchase a home, saving up for a down payment will allow you to purchase a home that you will like and not regret buying.
Note
The down payment can increase the size of home you can afford, and it can help you buy one in a better location. Essentially, it gives you more choices,because you will still qualify for the same amount on your mortgage; the down payment is just extra money that can increase your purchasing power.
When and How to Buy
When mortgage rates are low, you may be feeling the pressure to purchase right away, even if you don't have a down payment, so that you can save money in interest over the life of your loan. But before jumping into a major financial commitment, be sure you can handle it. Use our mortgage payment calculator to see the real costs of buying a home without a down payment.
When you do decide you are ready to purchase a home, you will need to make sure that you choose the best mortgage with a fixed interest rate. An adjustable-rate mortgage will cause your mortgage payments to go up as the interest rate increases. Finally, be sure you have some money saved for home repairs. That will ensure you're that ready for the unpredictable costs of home ownership.
FAQs
A down payment can significantly reduce the amount the borrower owes to the lender, the amount of interest they will pay over the life of the loan, and monthly payment amounts.
Why is a down payment on a house important? ›
The amount you put toward a down payment can dictate the loan amount you qualify for and the terms of your mortgage repayment. Putting money down on a house also helps lower your total loan amount. The less money you borrow, the more money you save on interest over the life of the loan.
Why do you need a down payment for a house on Reddit? ›
Lenders want to pick safe bets, so if you invest more of your money into the house, then you're less likely to default on their loan. You can get lower interest rates and better loan terms this way. Finally, if you put 20% down on a home, you skip out on having to buy PMI.
Is a 50% down payment good for a house? ›
Putting 50% down on a home could minimize the amount of interest you pay throughout the life of your loan. But a 50% down payment may be a lot of cash to tie up in a home, and you might risk having to borrow more expensively down the line.
What happens after you make a down payment on a house? ›
The more money you put down, the less you'll borrow for the mortgage and the more home equity you'll have from the outset. If you're buying a $400,000 home, for example, and putting 10 percent down, you'll take out a mortgage in the amount of $360,000: $400,000 minus 10 percent of that, or $40,000.
Why do you pay down payment? ›
Downpayments reduce the risk for lenders. Not only do they reduce the amount of money that needs to be lent out; by acting as the "cost of entry" for a loan, but a downpayment can also be used to prove that the borrower is serious about a loan.
What is the goal for a down payment on a house? ›
While 20% down avoids private mortgage insurance on conventional loans, many loan programs offer lower down payment options, especially for first-time buyers. These include 3% down conventional loans, 3.5% down FHA loans, and 0% down VA or USDA loans.
Should you pay down payment? ›
You could get a lower interest rate.
The more money you put down, the less you'll have to borrow, making you less of a risk to the lender. As a result, higher down payments typically correlate with lower interest rates.
Why you shouldn't put a downpayment on a house? ›
#5: It's not easy to access home equity.
Once that money is used for a down payment, you can't get it back – until you sell your home or take out a home equity line of credit (HELOC). Home equity is not a liquid asset.
Why you should pay down your mortgage? ›
You want to save on interest payments: Depending on a home loan's size, interest rate, and term, the interest can cost hundreds of thousands of dollars over the long haul. Paying off your mortgage early frees up that future money for other uses.
For example, certain programs may have minimum credit score requirements or income limits. Additionally, using down payment assistance could mean you have a larger mortgage to pay off, resulting in higher monthly payments or a longer repayment period.
Is it worth putting a big down payment on a house? ›
There are, in fact, many benefits to making a larger-than usual down payment, as we'll discuss below, including: avoiding having to pay for private mortgage insurance. reducing the amount of your monthly mortgage obligation. reducing the total amount of interest you'll owe.
What is the lowest acceptable down payment on a house? ›
A conventional loan down payment could be as little as 3 percent. FHA loans require as little as 3.5 percent, and VA loans and USDA loans have no down payment requirement at all. Most homeowners don't put 20 percent down.
What credit score is needed to buy a house? ›
The minimum credit score needed for most mortgages is typically around 620. However, government-backed mortgages like Federal Housing Administration (FHA) loans typically have lower credit requirements than conventional fixed-rate loans and adjustable-rate mortgages (ARMs).
Do down payments get refunded? ›
In other words, you won't see a refund for the down payment because it was never processed in the first place. You can't choose to make a down payment if it's not offered to you. But you can begin making payments of any amount as soon as your loan is confirmed. Also, you can't change the amount of your down payment.
How much house can I afford with $10,000 down? ›
If you have a conventional loan, $800 in monthly debt obligations and a $10,000 down payment, you can afford a home that's around $250,000 in today's interest rate environment.
Is it worth putting money down on a house? ›
Your decision should be based on what works best for your current situation and future plans. But if your budget allows for a larger down payment, it can potentially lead to lower monthly mortgage payments and less interest paid over the life of your loan, providing long-term financial benefits.
