Down Payment Strategies: How Much to Put Down on a House
Deciding how much to put down on a home is one of the biggest financial decisions you'll make. While 20% is traditional, many buyers put down less. This guide explains pros and cons of each option and helps you choose the right strategy for your situation.
Down Payment Options Overview
| Down Payment | Loan Type | PMI/MIP | Pros |
|---|---|---|---|
| 20%+ | Conventional | None | Best rate, no PMI |
| 10-19% | Conventional | PMI required | Lower PMI cost |
| 5-9% | Conventional | PMI required | Lower upfront cash |
| 3.5% | FHA | MIP required | Easier qualification |
| 3% | Conventional | PMI required | Lowest conventional |
| 0% | VA/USDA | VA fee/none | No down payment |
Why 20% Down Payment Matters
A 20% down payment is significant because it eliminates Private Mortgage Insurance (PMI) on conventional loans and often qualifies you for the best interest rates.
Benefits of 20% Down
Cost Comparison: 20% vs 10% Down
$300,000 home at 6.5% interest rate:
Monthly: $302 less ($189 payment + $113 PMI). Total interest: $37,004 less. Combined savings over 30 years: ~$145,000+
Lower Down Payment Options
Not everyone can afford 20% down. Fortunately, several programs allow lower down payments.
3% Down Conventional
Many lenders offer 3% down conventional loans for first-time buyers. Requires good credit (typically 620+) and PMI until you reach 20% equity.
FHA Loan: 3.5% Down
FHA loans require only 3.5% down with credit score 580+. Credit scores 500-579 require 10% down. FHA has both upfront MIP (1.75%) and annual MIP.
VA Loan: 0% Down
Veterans, active military, and some spouses can get VA loans with 0% down payment. No PMI, but there's a VA funding fee (can be rolled into loan).
Funding fee: 1.25-3.3% depending on service and usage
USDA Loan: 0% Down
USDA loans offer 0% down for homes in eligible rural areas. Income limits apply. Has guarantee fee (1%) but no ongoing mortgage insurance.
Eligible areas: rural and some suburban locations
PMI vs MIP Costs
When you put down less than 20%, you'll pay mortgage insurance. The type depends on your loan.
• 0.25-1% of loan annually
• Paid monthly (or upfront)
• Cancelable at 20% equity
• Cost varies by credit score
~$50-225/month on $270K
• Upfront: 1.75% of loan
• Annual: 0.15-0.75%
• Often lasts full loan term
• Same rate regardless of credit
~$4,725 upfront + $68-203/mo
PMI can be canceled once you reach 20% equity. FHA MIP often lasts the entire loan term unless you refinance to conventional. This makes FHA more expensive long-term for those who build equity.
When Putting Down Less Makes Sense
You want to buy now but haven't saved 20%. Lower down payment lets you enter the market sooner and start building equity through appreciation.
Don't drain all savings for down payment. Keep 3-6 months expenses as emergency fund. Lower down payment preserves liquidity for unexpected costs.
If you can invest the money at higher returns than the PMI cost, putting down less may be financially optimal. Compare PMI cost vs expected investment returns.
In rapidly appreciating markets, buying sooner with lower down payment captures appreciation that might outweigh PMI costs. Waiting to save 20% might mean higher prices.
Many programs offer grants or low-interest loans for down payment assistance. These can help you buy with minimal upfront cash while building equity.
Down Payment Assistance Programs
Many programs help buyers with down payment and closing costs. These vary by state and locality.
Types of Assistance
Free money, no repayment. Often for first-time buyers with income limits.
Loans forgiven after living in home for set period (5-10 years typically).
Second mortgage with low/no interest, repaid when you sell or refinance.
- • State Housing Finance Agencies (HFAs)
- • Local city/county programs
- • Employer homebuyer programs
- • Nonprofit organizations
- • HUD-approved housing counseling agencies
Using Gift Funds for Down Payment
Family members can gift money for your down payment. Loan types have different rules about gift funds.
• Gifts allowed for entire down payment
• Must document source
• Gift letter required
• 3-5% down: gifts OK for all
• 10-20% down: gifts OK for part
• Gifts allowed for entire down payment
• Family, employer, charity sources
• Gift letter + documentation
• Very flexible with gifts
Gift letter must state: donor name, relationship, amount, that no repayment is expected, and donor's contact information. Lender may require bank statements showing donor had the funds.
Choosing Your Strategy
Decision Framework
Can I save 20% in 1-2 years without draining emergency fund?
Is the market appreciating fast? Waiting might cost more?
Could I invest saved money at returns above PMI cost?
Are there down payment assistance programs I qualify for?
Am I eligible for VA or USDA zero-down loans?
If YES to questions 1 or 3: 20% down may be optimal. If YES to 2, 4, or 5: lower down payment may be better. Consider both financial and personal factors like timeline and stability.
Frequently Asked Questions
Can I buy a house with 5% down?
Yes. Many conventional lenders allow 5% down with good credit (620+). You'll pay PMI, which can be canceled once you reach 20% equity. FHA allows 3.5% down if your credit is 580+. 5% down on a $300K home = $15,000 down payment.
Is it better to put down 20% or invest the money?
Depends on returns. PMI costs ~0.5% annually. If you can invest at 7%+ returns, investing might beat the PMI cost. However, 20% down also gives you a lower rate and instant equity. Run the numbers for your specific situation with our calculators.
How much should I save for a house total?
Budget for: down payment + closing costs (2-5%) + moving costs + immediate repairs + emergency fund. For a $300K home: 10% down ($30K) + closing ($6-15K) + moving ($2-5K) + repairs/furniture ($5-10K) = $43-60K total cash needed.
Can I use retirement funds for down payment?
You can withdraw from IRA for first home purchase (up to $10K) without the 10% early withdrawal penalty, but still pay income tax. 401(k) loans are also an option. Consider carefully: retirement funds are for long-term security. Borrowing reduces future retirement savings.
Does a larger down payment get a better rate?
Often yes. Lenders see larger down payments as lower risk. 20%+ down typically gets the best rates. 15% down might get slightly better rates than 5% down. Also, 20%+ eliminates PMI entirely, which effectively improves your rate by ~0.5% since you're not paying that insurance cost.
Calculate Your Down Payment
Use our mortgage calculator to compare different down payment scenarios.
Try Mortgage CalculatorDisclaimer: This guide provides general information. Down payment requirements vary by lender, loan type, credit score, and location. Consult with lenders and financial advisors for advice specific to your situation.