Estimate Your Down Payment

TLDR: You can put as little as 3.5% down, but a higher down payment will result in a lower monthly payment. Put down 20% of the sale price and you won't pay Private Mortgage Insurance (PMI).

True or False: You need 20% of the house price as a down payment.

False!

It may seem unnecessarily far in advance, but you need to decide how much to put down before you even start looking at houses because it will determine your maximum price range.

A down payment is a percentage of the sales price that you intend to pay toward the house at closing. It's typically a requirement for conventional loans as it's considered your "skin in the game."

At closing, your down payment will go toward the price promised to the seller, and the lender will pay the remaining balance. The "remaining balance" that the lender pays to the seller at closing ends up being the total loan amount, which is the amount that is used to calculate your monthly mortgage payment.

Example of Loan Amount

If you buy a $350,000 house and put $35,000 down (that's 10%), the total loan amount will be $315,000. $315,000 will be the amount that determines your monthly mortgage payment, not the purchase price of $350,000.

It may seem unnecessarily far in advance, but you need to decide how much to put down before you even start looking at houses because it will determine your maximum price range.

A down payment is a percentage of the sales price that you intend to pay toward the house at closing. It's typically a requirement for conventional loans as it's considered your "skin in the game."

What is the minimum I need to put down on a house?

It’s a great question and one of the first things people think of, since affording the down payment is usually the biggest barrier to buying a house.

While most buyers think of the minimum down payment as being the standard 20% of the purchase price, you don’t actually need to save up 20% these days. Even conventional lenders, who are typically more risk averse than an agency such as the Federal Housing Administration (FHA), can require as little as 3.5% down. VA loans (not for Virginians, but for Veterans) can be obtained by military personnel and borrowers can put as little as 0% down. That certainly makes home buying much more accessible, but there is a catch to putting down lower down payments.

Putting down less than 20%? Be prepared to pay Private Mortgage Insurance

Private Mortgage Insurance, or PMI, is a federally required monthly insurance premium that you'll have to pay if you are putting down less than 20% on a property. The less buyers put down at closing, the more risk lenders end up taking on, so lenders require that buyers pay for insurance against this risk in the form of PMI on any property where the down payment is less than 20%. Lenders are federally required to remove PMI once a buyer has paid 22% of the purchase price, but a borrower can ask for the lender to remove PMI after they own at least 20% of the property.

Here’s an example of how increasing the down payment will significantly reduce your monthly mortgage payment.

Fun Fact

The down payment will convert into equity after you close on the house. Remember, equity–or how much of the house you actually own–is equal to the market value of the house minus the loan(s) on the house.

Your Equity

=

Market Value of Property

-

Debts owed on Property

How much should I put down?

How much you can put down is a very different question than how much you should put down. As with so many other questions, the answer is, "It depends." Some people have a goal of being debt-free as soon as possible, and some like to reduce the size of the monthly mortgage payment. If either of those are your preference, you'll want to put more down. However, if you're financially savvy and have the willpower to invest the funds you didn't use for a down payment into an investment vehicle that yields more than the amount of interest you're paying for the mortgage, a lower down payment option might be the better avenue to take. While debt may be scary to some, taking out lower interest debt and investing it in higher yield returns can be a profitable plan.

There is another consideration when deciding how much to put down: a larger down payment will allow you to buy a more expensive house. Let's say you only qualify to borrow $250,000 because that's the maximum monthly payment your income will allow, but your dream house is $300,000. If the lender won't loan you more than $250,000, you can save up the difference to use as a down payment and buy your dream home.