How Much Down Payment for a House? The 20% Down Myth

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Mike Romano

May 1, 2023

Mike Romano is a mortgage industry veteran with over 20 years of experience. His expertise spans mortgage technology, credit risk, and loan origination, and he has spoken at many mortgage and fintech conferences. He has a Bachelor's and MBA from the University of California, Berkeley and currently resides in Austin, TX. NMLS # 2515901

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    Of all the home-buying advice out there, none is more prevalent than this: “Under no circumstances should you buy a house unless you can put 20% down.” But is this really true anymore? Is a 20% down payment necessary? And if not, then how much down payment for a house do you actually need? 

    Spoiler alert: You might not need as much as you think. 

    Not only is a 20% down payment impractical and often unattainable, but it’s also just a bit tone-deaf. Everyone’s circumstances are different, and 20% down might not be the best option for many people. 

    We’re here to debunk the 20% down payment myth once and for all. We’ll go over the benefits of a 5% vs. 10% vs 20% down payment, and help you understand how much you should put down on a house to get the most benefit.

    Get more for your money with down payment assistance

    You might not need to put 20% down on a house, but a bigger down payment has its benefits. Many first-time home buyers qualify for down payment assistance to help with the upfront costs of homeownership.

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      Disclaimer: This article is for informational purposes only and should not be considered as legal or financial advice. Please consult an attorney, mortgage lender, or CPA for guidance on your specific situation.

      How much is a down payment on a house in today’s market? The story behind 20% down 

      How much is a down payment on a house in today’s market? 

      Conventional wisdom says you need to pay 20% of your home value upfront at the time you purchase, AKA a 20% down payment. But that’s a huge amount of money, especially with house prices being so high in many parts of the country

      Putting 20% down on a house might have been the status quo at one time, but it isn’t actually necessary anymore. (Although it’s a good idea if you can, and it might be possible even if you don’t have the money saved in the bank. But more on that in a minute.)

      A “20% down” origin story

      So, if it’s not necessary, then where did the 20% down payment concept come from? 

      Long, long ago, in a land not so far away, you couldn’t even get a mortgage — they just didn’t exist. You had to buy land outright (or inherit it, or homestead for it) and then build the house yourself. 

      Banks didn’t use the concept of lending money until the 1860s, but even then, the amount of money you could borrow was substantially less and had a shorter loan period than the typical 30-year mortgages of today. 

      This continued until the1930s and the Great Depression. With the foreclosure crisis during the Great Depression, the government created the Federal Housing Administration (FHA) to back mortgages. The FHA required a 20% down payment as insurance in case the homeowner defaulted on the loan.   

      Should I put 20% down on a house now?

      But all of this was nearly a hundred years ago. A lot has happened in that time, especially in lending. Most people take out large loans in order to buy their homes over time with interest. Housing costs have risen, and 20% down is no longer feasible for many homeowners. 

      The industry has developed other ways to hedge against default: namely, Private Mortgage Insurance (PMI). 

      In today’s market, you don’t necessarily need a 20% down payment to buy a house. But if you do buy a house with less than 20% down, you are required to pay an extra monthly fee for PMI. PMI is exactly as it sounds: insurance to protect your lender in case you default on your mortgage. 

      Once you have 20% equity in your home, you can request to end your PMI. Alternatively, it automatically drops off when your equity reaches 22% of the value of your home.  

      How much should you put down on a house? Is 20% right for you? 

      But we still haven’t answered the question of how much you should put down on a house. This is going to depend on a number of factors, including your financial situation, the cost of your home, and the requirements of your mortgage lender. 

      In many cases, you aren’t required to put 20% down, but there are benefits. So even if you don’t have to put 20% down, it’s worth considering. 

      Four benefits of putting 20 down on a house 

      There are four distinct benefits to putting 20 down on a house, if it’s feasible for you to do so. (Which it might be, especially with down payment assistance, which we’ll explain in more detail at the end of this article.) 

      1. It gives you more credibility as a borrower

      Mortgage companies are taking a risk when they lend you money to buy a house. Can you afford the monthly payments? Will you be a consistent borrower? 

      These are all risk factors that they’re more comfortable taking if you’ve put a bigger chunk of money down, because this down payment helps to secure and guarantee their risk (make it less risky). 

      2. You don’t have to pay Private Mortgage Insurance

      When you put 20% down on a house, you aren’t required to pay Private Mortgage Insurance. PMI rates vary, but they usually fall within .58% to 1.86% of your loan. This could easily add a few extra hundred dollars to your mortgage payment each month. 

      Say you make 50K a month and you’re on a tight home buying budget. That extra payment could make a big difference in terms of how much house you can afford on your salary.  

      3. Better interest rates 

      The more money you put down on a house, the less risky your loan becomes. When you pay 20% or more down on your house up front, you can qualify for the best loans your lender can offer because they feel more comfortable with the risk. 

      4. You own more of your house upfront 

      When you buy a home, interest is front loaded on that loan, which means all of your payments for the first 12 years (on average) go mostly towards interest, with only a small portion going towards the principal of your home. 

      This means that during those first 12 years, very little of what you pay each month actually goes toward equity (how much of your house you actually own.) If you pay 20% down on your house from the get-go, you own more of your home immediately. 

      If you sell before you’ve paid off your entire mortgage, you can capitalize on the increased equity you’ve made by paying your mortgage monthly. 

      Is 20% really necessary? 5 vs. 10 vs 20% down payment 

      So the 20% down payment concept was derived to benefit everyone. But today’s market is a little bit different and the prospect of actually having 20% down to buy a house is both a wonderful fantasy and largely unlikely. In fact, in 2022, the average home buyer only put 6% down for their down payment

      Saving enough money for a 20% down payment in addition to closing costs seems even more unlikely. Who can afford that?

      There are a lot of loan options available for all types of buyers, some with 0% or 3% down payment requirements. Do your research and find what works for your situation. 

      Ultimately, if you can put 20% down for your home, good for you! It’s going to benefit you in the long run. But if you can’t, know that you’re not alone and that it’s not expected or required to buy a home. 

      Take solace in knowing that you are making a good first step to home ownership, even if it isn’t the pristine ideal. 

      Which brings us to the final piece to this puzzle. Even if you don’t have a 20% down payment saved up in the bank, you might be able to access down payment assistance to help you get there (or close to it.) 

      Boost your buying power with down payment assistance

      There are a number of programs for down payment assistance (DPA), available at the federal, state, and local level. Many of these programs are designed specifically to help first-time home buyers with moderate incomes put more money down on their homes. 

      Down payment assistance comes in the form of cash grants, loans, and special credit programs. If you’re struggling to figure out how much down payment you can muster for your house, DPA is worth looking into. 

      That being said, there are a lot of programs out there, and it can be difficult to make sense of which programs exist and what assistance you’ll qualify for.  

      With Stairs Financial, you can easily find out exactly which down payment assistance programs are available to you, so you can make a more informed decision.

      Stairs connects you to qualified lenders who work with all the down payment assistance programs you might qualify for, then lets you compare your options side-by-side.

      Learn more.

      Find up to $15,000 towards a home 🏠

      Compare local down payment assistance and find a mortgage, fast.

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