When buying a house, your down payment is the money you pay directly to a seller to lock in the deal. And unless you’re paying cash in full — i.e., a down payment of 100% — the rest of the sales price will be covered by a mortgage lender.
Because of this, the size of your down payment is really more for the lender’s sake than the seller’s. The more you put down, the more financially stable you look and the less risky a loan to you becomes. So the first step to home ownership, then, is saving up a suitably-sized down payment to secure the best possible mortgage.
But what does “suitably-sized” mean, and what does the “best possible mortgage” look like?
This is where the situation becomes more subjective. Ultimately, what’s best for any individual and property is going to depend on one’s personal financial situation and long-term goals, as well as factors like income, credit, age, and even marital status. Before making any decision, you’ll always want to consult with a professional like an experienced real estate agent who can give you personal, tailored advice.
A Crash Course in Down Payment Calculations
Down payments are expressed as a percentage of the total value of a home, or specifically its purchase price. Your mortgage will cover the remaining cost, and the correlation between these numbers sets the loan-to-value (LTV) ratio of your assessment.
This is simpler than it sounds: if you put 10% down on a home that costs $100,000, you’ll need a mortgage of $90,000 — a loan worth 90% of the home’s value. This is the LTV ratio, and as you pay off your mortgage this number will drop until it hits 0% and you own the full value of your home.
Though other factors like your credit score and debt-to-income ratio are taken into account by lenders, this LTV ratio is ultimately what influences your interest rates and mortgage insurance costs. It’s important to keep it in mind that the higher your down payment, the lower your initial LTV ratio.
What’s a Standard Down Payment?
The figure that you’ll hear most often with regard to down payments is 20% — and this is indeed an important baseline — but most buyers put down significantly less than this. According to the National Association of Realtors’, the average down payment for homes in 2018 was just 13%. For first-time home buyers, it was even lower: 7%.
In fact, depending on the sales price, many lenders are willing to approve down payments as low as 5-10%. And if you qualify for a Federal Housing Administration (FHA) loan, you’ll only have to put down 3.5% on a 30-year fixed-rate home mortgage (with loan limits also varying based on sales price and location).
Some buyers have access to even leaner requirements. If you meet certain conditions, both Veterans Affairs (VA) and the US Department of Agriculture (USDA) loans can be secured with no money down at all — though you always have the option to put down as much as you want.
Why would you want to put down more money than you have to? Well…
The Benefits of Bigger Down Payments
Remember all that talk a few paragraphs ago about LTV ratios? The lower this ratio, the better your mortgage terms are going to be, and the way to keep this ratio low is with a big down payment.
In fact, the benefits of putting more money down play out in several ways. Not only will you be able to secure a more favorable interest rate — saving yourself potentially thousands of dollars — but you’ll also be able to pay off your (smaller) mortgage sooner — which will also save you money on interest in the long term.
Even more significant than these savings is the waiving of private mortgage insurance (PMI) with down payments of at least 20%. If you’re putting down less, your lender will want you to get PMI to guarantee they’ll be paid back in full — and this means extra costs, either paid annually or added to your monthly mortgage payments. How much this will cost exactly will depend on the LTV ratio of your mortgage, and can eventually be canceled entirely when the ratio is low enough.
The FHA loan equivalent of PMI is a mortgage insurance premium (MIP), which differs primarily in that it’s less flexible and can only be canceled with a full mortgage refinancing.
As a final added bonus to bigger down payments, let’s bring sellers back into play. If you’re putting good money down in your offer, that’s going to make you look more committed and financially viable than someone else who’s putting down less — which can increase your chances of closing the deal.
So, How Much Should You Put Down?
What you should put down on a house is going to be limited by what you can put down, so you’ll want a clear savings plan in place before you begin the process of buying a home. Remember that you’ll also need to keep money aside for closing costs and other purchasing expenses.
With that in mind, your best bet is to connect with an experienced real estate agent who can help you assess your financial situation and mortgage requirements to figure out what type of down payment you should be aiming for. Clever Partner Agents are all experts in their local markets, with comprehensive knowledge of the mortgage process as well as local lenders.
Better yet, Clever Partner Agents can return up to 1% of the purchase price in the form of the Home Buyer Rebate — which you can then put toward closing costs, mortgage payments, or, of course, a bigger down payment.