It sure isn't cheap to buy a home, and often the biggest chunk of money you'll have to shell out in the process is your down payment. Mortgage lenders often require some kind of down payment to buy a home for a few reasons.
Your lender wants to see that you have the financial standing to make your mortgage payments, and having that down payment is proof of means to make payments going forward. It's also proof that you'll have a real financial stake in the property from the beginning, as it's a lot easier to walk away from a home purchase if you start out with little or no equity and thus have less to lose.
It's actually not the case that you have to make a 20% down payment. This idea comes from the fact that if you put less than 20% down on a conventional mortgage loan, you'll have to pay for private mortgage insurance (also known as PMI) until you reach 20% equity in the property. PMI payments generally equal 0.5% to 1% of the amount you've borrowed and are paid monthly on top of your mortgage payment. There are also other low down payment mortgage options, such as government-backed mortgages (those guaranteed by the FHA, USDA, and VA). In some cases, you may not need to make any down payment at all to get one of these.
As the housing market cools from its peak earlier in the COVID-19 pandemic, the typical down payment has decreased. Redfin reported last month that in January 2023, the median down payment for homes sold was just 10% of the purchase price. So if you're hoping to buy with less down, you're definitely not alone. Let's take a look at the perks and drawbacks of making just a 10% down payment on a home purchase.
Why you may want to buy with less down
Owning a home can be a wonderful source of stability for you and your family if you're financially and emotionally ready to buy. As such, it's likely a very appealing option to buy sooner rather than later, especially if rent costs in your area keep rising and you're tired of moving. If you can buy with just 10% down, you'll get to start building equity faster and sleep better at night knowing that your landlord won't sell your home out from under you.
If you're in the fortunate position of having enough money saved that you could make a larger down payment, you may still want to only put down 10%. A home is an illiquid asset, meaning that if you needed cash in a hurry, it wouldn't be so easy to get to it if you have a lot of money tied up in your home. For this reason, buying a home with all cash also may not be a good idea.
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And what if something goes wrong with the home? If you put all your cash into a down payment and leave yourself with an inadequate emergency fund, you'll have to go into debt to pay for repairs the first time something breaks.
Why you may not want to buy with less down
Remember our discussion about mortgage insurance above? It's not just limited to conventional loans. If you get an FHA mortgage loan, your down payment requirement will vary based on your credit score (580 and above: 3.5%; 500–579: 10%). But in exchange for that lower down payment, you'll have to pay mortgage insurance premiums (MIP). One way or another, your lender will get more money out of you. And if you're in a conventional loan, that 0.5% to 1% of the home's purchase price could represent a nice chunk of change added on top of an already high mortgage payment, depending on how much your home cost.
If you end up with a VA or USDA mortgage loan, you may not need to make a down payment at all, depending on your lender and credit score. But you will still be responsible for paying upfront and possibly ongoing fees.
A major risk of making a low down payment on a home is ending up underwater on your loan. This is when you owe more than the home is worth.Since home values can and do fluctuate, it's a real possibility, especially at the beginning of your mortgage term. This only becomes a problem if you need to sell the home; if you're staying put and can afford your payments, it likely won't matter that you owe more than it's worth. Still, it's worth considering when deciding how much to put down.
Don't fall for the idea that you must make a 20% down payment to buy a home, as that just isn't true. But consider whether it might be a good idea to do so anyway.
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FAQs
If you're in the fortunate position of having enough money saved that you could make a larger down payment, you may still want to only put down 10%. A home is an illiquid asset, meaning that if you needed cash in a hurry, it wouldn't be so easy to get to it if you have a lot of money tied up in your home.
Is 10% enough for a down payment? ›
FHA loans typically require a minimum down payment of 3.5%, although you may need a down payment of at least 10% if your credit score is between 500 and 579.
Is 10 down payment enough for a car? ›
The typical down payment for a car is between 10% and 20% of the vehicle's total value. Your credit scores may impact the size of your required down payment. Higher credit scores may reduce a lender's down payment requirements.
What percentage is needed for a down payment? ›
In most cases, you'll need a 20% – 25% down payment to qualify. If your credit score is above 720, you may qualify for an investment property loan with 15% down.
How to only put 10 down on a house? ›
Put 10% Down with No PMI by Using a Piggyback Loan
A piggyback loan, or a 80/10/10 mortgage, allows you to finance 80% of a home through a mortgage. Then, you put down 10% in cash.
Do you have to put a 10% deposit down? ›
With a first-time buyer mortgage, you're likely to be looking for a 90% or 95% mortgage deal (meaning you'll need a 5% or 10% deposit saved). When it comes to borrowing money in any capacity, it all comes down to risk.
How low is too low for a down payment? ›
Some lenders require a 5 percent minimum. Keep in mind, too, that to avoid PMI, you'll need to put down at least 20 percent. If you can't afford that high of a down payment, though, know you won't pay PMI forever. Once you reach 20 percent equity in your home, you can request that your lender remove PMI from your bill.
Does 15 USC 1662 B mean no down payment? ›
15 USC 1662 states that no advertisem*nt concerning consumer credit may state that a specified down payment amount is required in connection with the extension of consumer credit unless the creditor usually and customarily arranges down payments in that amount.
What is a realistic down payment for a car? ›
The typical down payment on a car ranges from 11% to 20% of the car's value. The credit bureau Experian says a 20% down payment might help shield you from depreciation. Depreciation refers to the ever-shrinking value of your car.
Is $2000 enough for a down payment on a car? ›
How much should you put down on a car? A down payment between 10 to 20 percent of the vehicle price is the general recommendation. But if you can afford a larger down payment, you can save even more money on interest payments over the life of the loan.
However, a 20% down payment is needed to avoid PMI premiums. Government-backed programs such as FHA loans, VA loans or USDA loans can require 0% to 10% but are more likely to charge upfront and annual fees. If you're living in a high-cost metro area, you may need a jumbo loan to afford a home.
Do I really need 20% down? ›
A 20 percent down payment may be traditional, but it's not mandatory — in fact, according to 2023 data from the National Association of Realtors, the median down payment for U.S. homebuyers was 14 percent of the purchase price, not 20.
Is 10% downpayment enough? ›
You do not have to put 20 percent down on a house. In fact, the average down payment for first-time buyers is between eight and 13 percent. There are also loan programs that let you put as little as zero down. However, a smaller down payment means a more expensive mortgage over the long term.
What credit score is needed to buy a house? ›
A good credit score to buy a house is one that helps you secure the best mortgage rate and loan terms for the mortgage you're applying for. You'll typically need a credit score of 620 to finance a home purchase. However, some lenders may offer mortgage loans to borrowers with scores as low as 500.
Can you get a mortgage loan with 10% down? ›
Can you get a California 10 Percent Down Payment Jumbo Loan? Yes, you can on primary residences and second homes.
Is $10 K enough for a down payment? ›
Conventional mortgages, like the traditional 30-year fixed rate mortgage, usually require at least a 5% down payment. If you're buying a home for $200,000, in this case, you'll need $10,000 to secure a home loan.
How much of a down payment do I need for a $300,000 house? ›
How much down payment for a $300,000 house? The down payment needed for a $300,000 house can range from 3% to 20% of the purchase price, which means you'd need to save between $9,000 and $60,000. If you get a conventional loan, that is. You'll need $10,500, or 3.5% of the home price, with a FHA loan.
What is a 10% down loan? ›
Generally, the first mortgage is set at 80% of the home's value and the second loan is for 10%. The remaining 10% comes from the home-buyer's savings as a down payment. This is also called an 80-10-10 loan.
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.
