One of the biggest hurdles to homeownership is saving for a down payment. The down payment significantly determines how much house you can afford, what type of loan you qualify for, and how long it takes to become a homeowner.
So, what is the typical down payment for homebuyers today? Let’s explore the details to help you understand this essential part of the home-buying process.
What Is a Down Payment?
A down payment is the portion of the home’s purchase price that the buyer pays upfront. The rest of the purchase price is typically financed through a home loan called a mortgage. Most conventional lenders ask for a 20% down payment, though special programs allow for much lower down payments, depending on other factors like credit history and income.
The down payment serves a dual purpose. For the buyer, it shows financial preparedness and commitment to homeownership. For the lender, it helps reduce the risk, as a larger down payment means the borrower has more equity in the home and is less likely to default on the loan.
Average Down Payment Amount
The National Association of Realtors (NAR) reports that the average down payment for homebuyers across the board was 12% in 2019. However, this number can vary depending on whether the buyer is purchasing their first home or is more experienced:
- First-time homebuyers tend to put down less, averaging about 6% down.
- Experienced homebuyers generally put down more, with an average of 16%.
Why the difference? Many experienced homebuyers use the proceeds from selling their previous home to help fund their down payment. 38% of buyers in the NAR study reported that money from selling their last home was a significant source of their down payment. However, the majority—60%—of buyers said they saved the money themselves.
Down Payment Requirements by Loan Type
The required down payment depends heavily on the type of loan you choose. Here’s an overview of the most common mortgage types and their minimum down payment requirements:
- Conventional Loan: A conventional loan typically requires a minimum of 3% down. However, if you put down less than 20%, you must pay private mortgage insurance (PMI) until you reach at least 20% equity in the home. PMI is not required for buyers who put down 20% or more.
- VA Loan: Veterans, active-duty military members, and eligible National Guard members need not make a down payment. The Department of Veterans Affairs backs VA loans, which are popular choices for those who qualify.
- USDA Loan: Also requiring no down payment, a USDA loan is available for buyers looking to purchase homes in rural or suburban areas. The U.S. Department of Agriculture backs these loans.
- FHA Loan: This government-backed loan requires a minimum 3.5% down payment and is available to buyers with lower credit scores. However, unlike conventional loans, FHA loans typically require mortgage insurance for the entire loan life, even after you’ve built 20% equity in the property.
Saving for a Down Payment
No matter what loan type you choose, saving as much as possible for your down payment is always a good idea. Here are some tips for saving more efficiently:
- Set up monthly contributions to a designated savings account for your down payment.
- Consider a side hustle to increase income and build your down payment fund faster.
- Cut unnecessary expenses in your budget to make room for more savings.
The more you save, the less you’ll need to borrow. This reduces your overall debt and can lead to more favorable loan terms, like lower interest rates and fewer fees.
Conclusion
The average down payment for a home can vary based on your situation, but understanding the typical amounts and loan requirements can help you prepare. Whether saving for a 20% down payment or opting for a government-backed loan that requires less, planning will ensure you’re financially ready for homeownership. By saving consistently and exploring your mortgage options, you’ll be one step closer to getting the keys to your dream home.
FAQs
Do you have to put a 20% down payment on a house?
No, a 20% down payment is not always required. Some mortgage programs, like FHA loans, require as little as 3.5% down, while others, like VA and USDA loans, require no down payment.
What is a good-sized down payment for a house?
A reasonable down payment size is typically 10-20% of the home’s purchase price. The more you can put down, the less you’ll need to borrow, which can reduce your monthly payments and potentially lower your interest rate.
How much are monthly payments for a home equity loan?
The monthly payment on a home equity loan depends on factors like the loan amount, interest rate, and loan term. Use a home equity loan calculator to estimate your monthly payments based on these factors.
How much is an excellent down payment for a home?
A good down payment fits your financial situation while still making homeownership affordable. Many financial experts recommend aiming for at least 10%, but putting down 20% will help you avoid PMI and lower your monthly payments.