Everyone knows that you need a down payment to buy a home. But how much is enough? In this post, we explain how to find the right answer for you.
When you think about buying a home, the first thing you think about is probably the kitchen, the backyard, or the master bedroom. Perhaps you’ll make pancakes for breakfast, or maybe you’ll BBQ on a sunny day. It’s exciting to imagine what your life will be like once you find the right home and move in.
But before you even get to that point, there are a few big questions you have to answer. One of these is: how much do I need for a down payment?
The down payment is often the biggest hurdle for prospective buyers, which is why it makes sense to have a plan before you start looking for homes.
Why You Need a Down Payment
Why does anyone need a down payment, anyway? The answer is that lenders require a down payment to protect them from losing money on the loan.
There are two important ways a down payment protects a lender. First, by showing you have a down payment, you’re indicating to the lender that you’ve been able to save up enough money, which means you have a better likelihood of paying the mortgage every month. Second, if something unexpected happens and you’re forced to default on your mortgage, the lender can recoup your down payment funds when they sell the home. The financial term for this is collateral.
The down payment means you are risking your own money when you buy a home. It’s important to keep this in mind, because if things go wrong, you could lose the entire down payment.
How Much Down Payment You’ll Need
The amount you’ll need for a down payment depends on a few factors, including:
- The price of the home
- Which type of loan you’re getting
- How much you can afford per month
Let’s take these one at a time and see how they affect your down payment.
- The price of the home
A down payment is usually calculated as a percentage of the home’s sale price. If the home is sold at a price of $100,000 then the required down payment could be anywhere from $3,500 (3.5%) to $20,000 (20%).
- Which type of loan you’re getting
Some loans require a larger down payment while others require a smaller one. The most common mortgages are called “conventional loans.” They are offered by private companies but are often backed by Fannie Mae and Freddie Mac, two government-sponsored enterprises. Conventional loans typically require a down payment of 5% to 20%.
Meanwhile, FHA loans, which are insured by the Federal Housing Administration, require a down payment of at least 3.5% to 10%. FHA loans can be a good option for low-income borrowers. Another government-backed mortgage is the VA loan, which is provided by private lenders but guaranteed by the VA. This is one of the only loans you can get with no down payment.
- How much you can afford per month
When you increase your down payment, you decrease the size of your loan. That also reduces your monthly payment. A general rule of thumb is that your mortgage shouldn’t be more than about 36% to 43% of your monthly income. In other words, if your monthly income is $4,000 then your mortgage payment should probably be less than $1,440. When you apply for a mortgage, your down payment must be large enough to ensure that you stay under budget on the mortgage payment.
To see how all these factors work together, here are a few examples:
| Loan Type | Monthly Payment | Home Price | Down Payment |
| Conventional (with 20% down) |
$500 | $100,000 | $20,000 |
| Conventional (with 10% down) |
$1,500 | $300,000 | $30,000 |
| FHA (with 3.5% down) |
$600 | $100,000 | $3,500 |
| FHA (with 10% down) |
$550 | $100,000 | $10,000 |
You should also keep in mind that there is something called mortgage insurance which adds to your monthly payment. Mortgage insurance is typically only required if your down payment is less than 20%.
Alternatives to a Down Payment
Because homes are getting more expensive, many people have difficulty saving up for a down payment to buy a home. This is especially true in larger cities where rents increase just as rapidly as home prices.
But if you find it hard to save up for a down payment, don’t give up. The good news is that there are alternatives for people who still want to take a step toward homeownership.
One such option is Divvy Homes. We make it possible to move into the home of your dreams while you continue to save up for a down payment to buy it. In fact, our program actually helps you automatically save up each month.
Click here to learn more about Divvy.