Traditionally, you needed to have a down payment of between 10% and 20% of your home costs saved up before you purchased a home. Mortgage lenders tried to protect themselves by having those standards, because it indicated that you likely would be more responsible with their money. It also protected them because they did not loan out the full value of your home. If you were to default on the loan, they were more likely to make a full recovery from the loss.
In recent years, however, things have changed. It is now possible to purchase your home with no down payment at all. That may sound like good news, but there is reason to be cautious.
Key Takeaways
- It's possible to buy a home without a down payment (or with a very small one), but it comes with risks.
- When you don't have 20% to put down, you usually have to have private mortgage insurance (PMI) in some form.
- If you buy without a down payment when home prices are at their peak, you may owe more than your home is worth if the housing market drops.
- A down payment can increase the size of home you can afford, and it can help you buy one in a better location.
Avoiding the Down Payment
In 2021, some banks offered near 100% financing for a home, with a 3% down payment being a widely advertised mortgage option. Certain couples may also qualify for an FHA loan, which eliminates the need for a large down payment. Banks also offer mortgages with easier qualifications, but this might not be the best option due to higher interest rates and closing costs.
When you don't have 20% to put down, you usually have to pay private mortgage insurance (PMI) in some form. But some people have even taken out two loans in order to avoid the cost of PMI—and still not have a down payment on their home.
The best way to avoid these costs, however, is to save up for a down payment for your home if possible. This is a better approach for several reasons.
Reasons to Have a Down Payment
First and foremost, a down payment proves that you are financially ready and responsible enough to buy a home. When you purchase a home, you are responsible for all of the maintenance costs related to it. You will need to pay for repairs and homeowners insurance. Saving up for a down payment proves to yourself and the bank that you are in a position to make those sacrifices. In many cases, your mortgage will be higher than the rent you're paying, so your ability to save demonstrates that you are ready for the increase.
Another reason to have a down payment is that it protects you in case you need to move, and the housing market has dropped. Many people can't sell their home because they bought them without a down payment when housing prices were at their peak, and now they owe more than their home is worth. There is no pretty way out of that situation. Either you will lose lots of money or you will ruin your credit—or you will do both.
Many people in that situation hang onto their homes, hoping that the circ*mstances will improve. Using a down payment does not completely prevent that from happening to you, but it does give you a solid buffer against a downturn. Unless your home value falls more than 20%, you are much better off, since you started with some equity.
Avoid Buyer's Remorse
Making a down payment on a home helps avoid any regret of buying your home. In addition to showing that you are financially prepared to purchase a home, saving up for a down payment will allow you to purchase a home that you will like and not regret buying.
Note
The down payment can increase the size of home you can afford, and it can help you buy one in a better location. Essentially, it gives you more choices,because you will still qualify for the same amount on your mortgage; the down payment is just extra money that can increase your purchasing power.
When and How to Buy
When mortgage rates are low, you may be feeling the pressure to purchase right away, even if you don't have a down payment, so that you can save money in interest over the life of your loan. But before jumping into a major financial commitment, be sure you can handle it. Use our mortgage payment calculator to see the real costs of buying a home without a down payment.
When you do decide you are ready to purchase a home, you will need to make sure that you choose the best mortgage with a fixed interest rate. An adjustable-rate mortgage will cause your mortgage payments to go up as the interest rate increases. Finally, be sure you have some money saved for home repairs. That will ensure you're that ready for the unpredictable costs of home ownership.
FAQs
A down payment can significantly reduce the amount the borrower owes to the lender, the amount of interest they will pay over the life of the loan, and monthly payment amounts.
Why is a down payment on a house important? ›
The amount you put toward a down payment can dictate the loan amount you qualify for and the terms of your mortgage repayment. Putting money down on a house also helps lower your total loan amount. The less money you borrow, the more money you save on interest over the life of the loan.
Is putting 50% down on a house a good idea? ›
If you put down 50%, your monthly principal and interest payments will be $979. That frees up $588 a month for you to spend on other things, or just over $7,000 a year. Furthermore, if you make a 50% down payment on your home, you'll minimize the amount of mortgage interest you have to pay.
What is the goal for a down payment on a house? ›
The primary reason financial experts recommend a 20% down payment is that conventional mortgage lenders typically require private mortgage insurance (PMI) on loans with lower down payment amounts. PMI protects lenders in the event that you default on your payments.
Does down payment affect the offer? ›
A higher down payment shows the seller you are motivated—you will cover the closing costs without asking the seller for assistance and are less likely to haggle. You are a more competitive buyer because it shows the seller you are more reliable.
Why do you pay down payment? ›
Downpayments reduce the risk for lenders. Not only do they reduce the amount of money that needs to be lent out; by acting as the "cost of entry" for a loan, but a downpayment can also be used to prove that the borrower is serious about a loan.
Why you shouldn't put a downpayment on a house? ›
#5: It's not easy to access home equity.
Once that money is used for a down payment, you can't get it back – until you sell your home or take out a home equity line of credit (HELOC). Home equity is not a liquid asset.
What is the biggest negative when using down payment assistance? ›
For example, certain programs may have minimum credit score requirements or income limits. Additionally, using down payment assistance could mean you have a larger mortgage to pay off, resulting in higher monthly payments or a longer repayment period.
Is it worth putting a big down payment on a house? ›
There are, in fact, many benefits to making a larger-than usual down payment, as we'll discuss below, including: avoiding having to pay for private mortgage insurance. reducing the amount of your monthly mortgage obligation. reducing the total amount of interest you'll owe.
How much down payment is good? ›
Home sellers often prefer to work with buyers who make at least a 20% down payment. A bigger down payment is a strong signal that your finances are in order, so you may have an easier time getting a mortgage. This can give you an edge over other buyers, especially when the home is in a hot market.
Cons of making a larger down payment
- Lesser liquidity. When you put down more than the minimum down payment for a home loan, you may drain your savings, putting an undue strain on your finances. ...
- Longer time to save. ...
- Lost investment income.
For a conventional mortgage in California, you typically need a minimum score of at least 600. If you qualify for certain government-backed loans, however, you may be able to buy a home with a score as low as 500.
How much house can I afford with a 100k salary? ›
With a $100,000 salary, you could potentially afford a house worth between $225,000 to $300,000, depending on your financial situation, credit score, and current market conditions. However, this is a broad range, and your specific circ*mstances will determine where you fall within it.
What is the best example of a down payment? ›
Final answer: A down payment is a portion of the total cost of an item, often a house or a car, that you pay upfront at the time of purchase. The best example from the options given is Robby who pays 10 percent of the cost of a condominium as a down payment.
Are down payments good or bad? ›
Lenders often require down payments, but even when they don't it's a good idea to put money down anyway. That's because a down payment can mean paying less interest, having lower monthly payments and protecting yourself from owing more than your car is worth.
How much will a seller come down on a house? ›
The amount a home seller will reduce their home's asking price depends on many factors, including the area's median prices, what comparable homes nearby are selling for and the length of time the home has been on the market.
Is it worth putting money down on a house? ›
Your decision should be based on what works best for your current situation and future plans. But if your budget allows for a larger down payment, it can potentially lead to lower monthly mortgage payments and less interest paid over the life of your loan, providing long-term financial benefits.
How much house can I afford with $10,000 down? ›
If you have a conventional loan, $800 in monthly debt obligations and a $10,000 down payment, you can afford a home that's around $250,000 in today's interest rate environment.
Why you should pay down your mortgage? ›
You want to save on interest payments: Depending on a home loan's size, interest rate, and term, the interest can cost hundreds of thousands of dollars over the long haul. Paying off your mortgage early frees up that future money for other uses.
