A down payment is the part of the purchase price you pay up front. The rest is financed with your mortgage. Many buyers think they need 20%, but that is only one option.
How it works
If you buy a $400,000 home with 10% down, your down payment is $40,000 and your loan is $360,000. A larger down payment means a smaller loan, and it can lower your monthly payment and help your loan terms.
The 20% guideline
Putting 20% down on a conventional loan generally avoids private mortgage insurance (PMI), and it gives you equity right away. On a $400,000 home that is $80,000. It is a goal for some buyers, but it is not required.
Lower down payment options
- Conventional loans: some programs allow 3% down for eligible borrowers. On a $400,000 home, 3% is $12,000.
- FHA loans: 3.5% down with a qualifying credit score. On $400,000, that is $14,000.
- VA loans: no down payment for eligible veterans and service members.
- USDA loans: no down payment for eligible properties in eligible areas.
Each program has its own eligibility rules, limits and costs, such as mortgage insurance or funding fees.
Pros of a larger down payment
- A smaller loan and a lower monthly payment
- Less interest paid over time
- A stronger offer in competitive situations
- More equity from day one
Do not forget the other costs
Closing costs are often 2% to 5% of the price, and you will also need money for moving, repairs and an emergency fund. Using every dollar on the down payment can leave you short. A smaller down payment may be reasonable if it keeps your finances healthy after closing.
Help with the down payment
Many states, cities and nonprofits have first-time buyer programs, such as grants or deferred loans. In California, for example, programs run through CalHFA and local agencies. Eligibility and funding vary and can change, so ask a lender which programs may apply to you.
How to save
- Open a separate savings account and automate deposits
- Review subscriptions and discretionary spending
- Direct tax refunds and bonuses to your down payment fund
Every borrower is different. If you would like to talk through your own situation, the MonaLending team is happy to help.
