The average down payment on a house is smaller than you think
How big do you think the average down payment on a house or condo is?
If you said 20 percent, you’re in good company.
A 2017 survey found that almost two in five people think 20 percent down is the minimum. But that’s far from true.
In 2019, NAR found that the average down payment on a house or condo was just 12 percent.
For first-time buyers, that number drops to six percent. And many people put down much less.
Check a few loan programs to see how much you need to put down on your new house. After all, you’ve nothing to lose but your landlord.
In this article:
Minimum down payments by type of mortgage (zero to three percent down)
Of course, the average down payment on a home is just a benchmark. Some buyers will want to put down more and some less.
But, if you’re currently renting or are a first-time buyer saving up, you’ll probably be most interested in the minimum down payment you can get away with.
>> Related: Before making a 20% down payment, read this
In that case, it’s worth noting that many mortgage programs allow as little as three percent or even zero down:
- 0% down payment — On VA loans (for veterans, service members and some surviving spouses) and USDA loans (for those on modest incomes buying in rural and some suburban areas)
- 3% down payment — The HomeReady mortgage from Fannie Mae or the Home Possible mortgage from Freddie Mac
- 3.5% down payment — The FHA loan, which is easier to get than those from Fannie or Freddie if your credit score’s iffy
- Proprietary programs — Some lenders offer 3%-down loans that require no ongoing private mortgage insurance payments
Hang on! What are private mortgage insurance payments? Don’t worry, we cover that below.
When a borrower puts down less than 20 percent, they’re usually required to pay private mortgage insurance (PMI) or a mortgage insurance premium (MIP). That means most people making an average down payment of 6-12 percent will be stuck with an extra monthly charge.
>> Related: Mortgage calculator with PMI
This is one of the biggest drawbacks to making a smaller-than-average down payment.
Mortgage insurance is one of the biggest drawbacks to making a smaller-than-average down payment.
In short, PMI and MIP are insurance policies that protect the lender if you default on your mortgage. So you’re paying to protect the company, not yourself.
And mortgage insurance payments can add up.
Put down a little less than the average down payment (5% or less), and PMI can easily come in at three figures ($100+) each month. Even on a modest mortgage of, say, $200,000.
How much you’ll actually pay will depend on other factors, including the type of mortgage and your credit report and score.
>> Related: How to avoid PMI with less than 20% down
Good news: PMI often goes away once you reach 20 percent equity
But there’s one piece of good news. Once your mortgage balance dips to below 80% of your home’s current market value, your lender should normally stop charging you PMI.
But that doesn’t apply to FHA loans. So you’ll have to refinance your way out of your PMI obligations with one of those.
Also, note that VA loans don’t charge ongoing PMI — even with zero down. There is an upfront “funding fee” instead of PMI, but that can typically be rolled up in your mortgage.
Does PMI mean you should wait until you have 20 percent down?
No! Or, rather, mostly no. But it depends on the property market where you live and your circumstances.
Overall, homeowners make way more money through home price inflation than they pay in PMI.
Overall, homeowners make way more money through home price inflation (appreciation) than they pay out in PMI. So it often makes sound financial sense to bite the bullet and pay the premiums.
Benefits of making a smaller-than-average down payment on a house
There’s one clear benefit to buying a house with a smaller down payment: You become a homeowner quicker. And, in all but a few areas, you’re likely seeing your property grow in value each year.
But what about PMI? Yes, you’ll likely resent every cent you pay out each month. But you’re almost certain to be free of it soon enough.
Either you can prompt your lender to stop charging it when your loan balance reaches 80% of your home’s market value, or you can refinance your way out of mortgage insurance on an FHA loan (which doesn’t let you cancel mortgage insurance, even with 20% equity).
As satisfyingly, you’re paying down your own mortgage, rather than your landlord’s. And you no longer have to follow his or her tenancy rules.
You’re young. Should you start saving for a down payment now?
Recently, Realtor.com broke down the numbers. It wondered how much someone who’s 18 years old today (well, in January 2019) would have to save each month to buy a home in 2031, when that person turned 30.
How much would someone who’s 18 today have to save to buy a home at age 30?
Of course, it had to make some assumptions about the future, including how much the median home would cost in 2031 ($386,310) and that “you find a mutual fund with a fixed 3% return a year.”
So how much would that member of Generation Z have to save each month to achieve the goal?
Well, it depends on his or her target for the down payment. But as a nationwide average:
- 5% down payment — $190 per month
- 10% down payment — $300 per month
- 20% down payment — $530 per month
Those numbers will be more doable for some savers than others.
Luckily, it’s not necessary for anyone to save $500 per month to make a 20 percent down payment. That’s why those low- and no-down mortgage options exist.
Should you make the average down payment of 6-12 percent, or more?
What you decide to put down on a house should be based on your current and future financials.
As federal regulator the Consumer Financial Protection Bureau (CFPB) points out, “When you make a larger down payment, you have lower monthly payments and your loan costs less overall.”
Here’s how the CFPB breaks down the numbers:
Use that for guidance. But don’t rely on the figures because they’re just a guide.
And make sure the assumptions it makes for its example (the size of the mortgage, the credit score, and the mortgage rate) are roughly right for you.
Is it worth it to make a bigger-than-average down payment on a house?
If you decide to carry on saving until you reach the magic 20% down payment figure, you’ll be in line for some significant rewards.
Why? Because in a worst-case scenario, lenders don’t usually lose money on a 20-percent-down loan if they have to foreclose. So they treat these borrowers as preferred customers.
Here’s what that means for you.
Benefits of putting 20 percent down or more
- Potentially lower mortgage rate
- Smaller monthly payments
- No mortgage insurance
If you make a 20 percent down payment, you may be offered a lower mortgage rate than someone with a smaller down payment.
True, your rate will also depend on some other factors: your creditworthiness, mainly, and how much you owe in other debts.
But 20% should earn you a lower rate than someone with a smaller down payment and the same credit score and debt-to-income ratio.
And of course, your monthly payments are bound to be lower the more you put down. Because besides your lower mortgage rate, you’re borrowing less.
If you buy a home for $300,000 with 20% down, you’re borrowing $240,000. But buy that place with 3% down and you’re borrowing $291,000. Guess which has the lower payment.
And the final advantage, as we explained above, is that you won’t have to pay private mortgage insurance if you’re able to put 20 percent down.
3 ways to save if you have a below-average down payment on a house
Suppose you’re keen to become a homeowner as soon as possible. But your savings aren’t enough for even a 3% down payment. Are there things you can do? You bet.
See if you qualify for a no-down-payment mortgage
You’ll only get a VA loan with 0% down if you’re a veteran, a current service member, or a member of a tiny related group. So check your eligibility.
No good? Never mind. You may still be able to get a USDA loan, which is also a no-down-payment mortgage.
But these come with their own eligibility requirements. You’ll need to have modest income and be happy to buy in a designated area — generally a rural one but also some suburbs.
Both those programs sometimes allow borrowers with zero savings to buy. But you’ll need a motivated seller who’s willing to cover your closing costs for you.
Check out down payment assistance
There are more than 2,000 down payment assistance (DPA) programs across the country.
Each DPA program provides loans or grants (you don’t need to pay those back) to homebuyers. Some down payment assistance programs will help with closing costs, too.
But each is different. So you need to find ones that operate where you want to buy and see what they offer. Here’s an article that will get you started:
Split the down payment with a co-borrower
There’s a growing trend for homebuyers to purchase with somebody else named on the mortgage, called “co-borrowing.” That can be someone who lives in the home like a roommate. Or, it may be an “investor non-occupant,” who lives elsewhere and has a purely financial role. Those are often parents, siblings or friends.
The co-borrower typically takes a financial interest in the property and shares the benefit of home price inflation with you. The upsides? Your co-borrower may chip in for the down payment. And his or her income and credit score count when you make your mortgage application.
The downsides? Few for you, except you’re sharing the profits of home price appreciation. And the co-borrower is on the hook if things go wrong.
Find out what you can afford with an average down payment
Want to see what kind of house you could afford with the money in your bank account today? Try a mortgage calculator.
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