With the exception of the VA and USDA programs, along with certain down payment assistance programs, almost every residential loan program does indeed require some sort of down payment. Many borrowers want to come to the closing table with as little cash as possible, and as the down payment amount is the largest chunk of change needed, the lowest down payment is often the request. A conventional loan can ask for a down payment of just 5.0 percent, with certain first-time buyer loans asking for a 3.0 percent down payment. FHA loans need a minimum down payment of just 3.5 percent of the sales price. But if you have more money to put into the transaction, should you?
Many times, this additional cash comes from the sale of a previous residence, but of course it doesn’t have to. While conventional loans do have low down payment options, with a down payment of less than 20 percent of the sales price, private mortgage insurance will be required. Making a down payment of 20 percent or more eliminates the need for PMI. A larger down payment obviously results in a lower monthly payment, which is another factor to consider.
Making a large down payment will also affect liquidity. A down payment is instant equity in a real estate transaction; the only way to get the money back is either through the sale of the property or an equity loan of some sort. Putting more money down often means tapping into a retirement account such as an IRA or pulling funds from any investment or savings account. When those funds are removed, interest is lost. A larger than required down payment could also mean the funds would be put to use in a better way, such as paying down consumer debt or paying off student loans, for example.
Considering an existing mortgage, loan programs today allow you to pay the loan down. Perhaps retirement is soon coming into the picture and paying down a mortgage is a solid financial plan. One thing to note, however, is that with a loan carrying a fixed interest rate, the payment will not change; just the loan amount will be lowered. With an adjustable rate loan, however, the monthly payments will change as the loan amounts are reduced.
Coming in with a large down payment is a personal financial decision, and for most that means it’s time for a talk with a financial planner and your loan officer. There are multiple considerations when paying extra on a mortgage or coming to the settlement table with a larger-than-required down payment, which means seeking advice from a professional.
Frequently Asked Questions About Down Payments
Can I buy a house with 3% down?
Some conventional mortgage programs allow qualified buyers to purchase a home with as little as 3% down. Eligibility requirements vary, so speak with a mortgage professional to determine which programs may be available to you.
Is 20% down required to buy a house?
No. Depending on the loan program and your qualifications, you may be able to purchase a home with significantly less than 20% down.
Is it better to put 20% down on a house?
Not necessarily. A 20% down payment can reduce the loan balance and may eliminate PMI on a conventional mortgage, but using that much cash can also reduce your savings and liquidity. The best choice depends on your overall financial situation.
What is the minimum down payment for an FHA loan?
FHA loans typically require a minimum down payment of 3.5% for borrowers who meet the applicable requirements.
Do first-time home buyers have to put 20% down?
No. First-time buyers may have access to mortgage programs and down payment assistance options that require substantially less than 20% down.
Do I need money for closing costs in addition to my down payment?
Usually, yes. Buyers should plan for closing costs and prepaid expenses in addition to the down payment. The exact amount varies depending on the transaction, loan and property.
Should I use all of my savings for a down payment?
Generally, buyers should carefully consider how much cash they will have remaining after closing. Maintaining an emergency fund and enough money for moving, repairs and unexpected expenses can be important.
The Bottom Line: The Best Down Payment Is the One That Fits Your Financial Plan
There is no single down payment amount that is right for every home buyer.
A 3% down payment may make sense for one buyer, while another may prefer 10%, 20% or more. The goal isn’t necessarily to put down as little as possible—or as much as possible.
Instead, consider the entire financial picture:
- How much can you comfortably afford each month?
- How much cash will you have after closing?
- Will you have to pay PMI?
- What are your closing costs?
- Do you have other debts you should pay down?
- Are you saving enough for retirement?
- Will you need money for repairs or renovations?
- How important is maintaining a larger emergency fund?
If you’re considering buying a home in Wheaton, Naperville, Glen Ellyn, West Chicago, Winfield, Carol Stream, Warrenville or another Chicago suburb, our team can help you understand the home-buying process and connect you with the professionals you need to make informed decisions.
This article is provided for general educational purposes only and should not be considered financial, tax or mortgage advice. Mortgage requirements, interest rates, down payment requirements and available assistance programs can vary. Consult with a qualified mortgage professional and financial advisor regarding your individual circumstances.
