Buying a home is an important step toward financial stability. And homebuyers, especially first-time buyers, often have many questions about the financial commitment required to purchase a house. One of the biggest questions we see from homebuyers is how much do I need for a down payment to buy a house?
The answer depends on a few different factors, including the value of the home you plan to purchase, your home loan type, and your credit history. But we're going to break all of that down for you so that you can start budgeting for your new home!
What Is a Down Payment?
A down payment is the amount of the purchase price for your new home that you must pay upfront. The rest of the purchase price can be financed through a home mortgage loan.
The down payment is typically expressed as a percent of the purchase price. For example, you might hear someone say they put 20% down. This means they paid 20% of the purchase price upfront and got a loan for the other 80%.
Since the down payment is based on the purchase price, the dollar amount varies widely depending on the value of the home you’re buying. 20% of a $200,000 home, for example, would be $40,000, while 20% of a $600,000 home would be $120,000. But your actual down payment could potentially be less.
How Much Do You Need for a Down Payment?
The old rule of thumb was that homebuyers should have a 20% down payment.[1] But should you put 20% down on a house today? Not necessarily.
This 20% “rule” was established generations ago when home prices were much lower, and interest rates were much higher. Back then, it made more sense to make a large down payment like 20% because:
- People could reasonably save 20% for a down payment, and
- The high interest rates made it more expensive to borrow money.
But today, home values are high,[2] and there are more loan options available to buyers.[3] You might only be able to afford a 5% down payment. And that’s okay because home loans generally come with lower interest rates than most other loan types (like student loans, for example) making the cost of financing reasonable.[4]
So, how much do you need for a down payment to buy a house?
Today’s buyers should plan to put at least 3-5% down on a home,[5] depending on their loan type and credit score. But before you decide to put less than 20% down, we need to discuss an important consideration: mortgage insurance.
What Is Mortgage Insurance?
Mortgage insurance (sometimes called private mortgage insurance or PMI) is a policy that protects your lender in case you fail to repay your mortgage loan. Lenders typically require that homebuyers purchase mortgage insurance if they make a down payment of less than 20%.[6] This is because lenders are taking a big financial risk by loaning you a high percentage of the home’s value.
The cost of the mortgage insurance is typically rolled into your monthly mortgage payment.
Popular Home Loan Options
As we mentioned, your down payment depends on your home loan type. Different loan types have different minimum requirements. Here are some of the most popular options.
Conventional Loans
Conventional loans have a minimum down payment of 3%.[7] You might need a higher down payment if you have any issues on your credit report. You typically need a credit score of around 620 to qualify for a conventional loan.[8]
FHA Loans
FHA loans were created to make homeownership accessible to buyers through lower credit and down payment requirements. The minimum down payment for an FHA loan is 3.5%.[9]
0% Down Payment Loan Options
You might have heard about people buying a home with “zero down.” And there are legitimate ways to do this. But you and your new home need to fit specific criteria to make this work. Here are two 0% down payment programs.
- VA loans are only available to eligible military service members, veterans, and surviving spouses. But they offer 0% down and don’t require any mortgage insurance.[10]
- USDA loans offer 0% down payment options for well-qualified buyers who are purchasing a home in a qualified rural area.[11]
Which Loan Type Is Right for You?
Here are a few general guidelines to help you choose the best home loan type for your situation.
- Conventional loans are flexible and may be the right option for the average homebuyer with good credit.
- FHA loans are a great option for buyers who don’t qualify for a conventional loan because of lower credit scores. FHA loans are also a good option for first-time buyers.
- VA loans may be the right option for those who have served in the armed forces (and surviving spouses).
- USDA loans are a good option for buyers who plan to buy a home in a rural area and want the 0% down payment benefit.
How Much Should You Put Down on a Home?
Deciding how much to put down on your new home requires a few careful considerations.
- How much will your bank require as the minimum down payment? 3-5% is standard in many cases, but you might need more of a down payment if you have credit issues.[12]
- How much can you afford to put down? You may want to make sure you have enough cash on hand left to cover your closing costs and moving expenses.
- Do you want to put more down to reduce your monthly payment? The more you pay upfront, the less you’ll have to finance, and the lower your monthly mortgage payment will be.
- Do you want to put down more to reduce your interest expense? The higher your down payment, the lower your loan amount. And the lower your loan amount, the less you have to pay in overall interest expense. Plus, you might even qualify for a lower interest rate if you make a higher down payment.
- Do you want to put 20% or more down to avoid PMI? If you’re able to make a down payment of 20% or more, you may not need to make monthly mortgage insurance payments.[13]
We know this is a lot of information and might seem overly complicated. But all these variables and options are actually a good thing because they allow homebuyers to find a home loan that best suits their unique financial situation!
And you don’t have to figure all of this out alone. PNC bank is happy to provide resources to help you make smart homebuying decisions. And when you need to discuss your options with a live loan representative, you can give us a call at 1-855-900-3564. We’re here to make the mortgage process as simple as possible for you!
