Is It Better to Put a Large Down Payment on a House?
When you’re in the market for a new home, most people will advise you to put as much money down as possible.
It’s common to hear advice to do whatever you can to save up for the down payment, even to the point of assuming that a 20 percent down payment is standard for home loans.
Believe it or not, a large down payment isn’t always necessary—or even wise. Let’s take a look at the truth behind the many rumors regarding this important part of the home financing process.
Advantages of a Large Down Payment
Is it better to have a bigger down payment? It can be. Here are some key reasons why:
- A large down payment can mean lower (or no) PMI. Home financing companies will typically charge PMI for home loans that have less than 20 percent down. This can lead to hundreds of dollars needlessly spent on insurance that doesn’t technically benefit you.
- A lower LTV. A lower loan-to-value ratio means that you will owe less on your home. This makes you become attractive to lenders and also means you’ll get more equity faster.
- Better chances at approval. A higher down payment generally can get you approved in situations where it would be difficult to get that “yes!” from a home financing company.
- Lower interest rates. A lower LTV ratio makes you more attractive and less risky to a home financing company. This means you get to reap the rewards in the form of lower interest rates (or profit rates, in the case of Islamic home financing.)
- Less interest paid overall. A higher portion of the loan paid off, plus lower interest rates mean you can save tens of thousands of dollars in interest on the course of your home loan.
- Lower monthly payments. This is the most commonly-cited perk of a larger down payment. Less interest and less principal means that your monthly payments will be noticeably smaller.
- It may be required. A traditional loan generally requires a minimum of 20 percent down. If you want to get a co-op purchase financed or a second home in certain parts of the country, you may need a down payment as high as 30 percent or more.
Does a Higher Down Payment Make Your Offer Stronger on a House?
The answer is “yes”. A higher down payment can make a huge impact on your offer. If you live in a hot market (or are trying to live in one), the best thing you can do is offer a higher down payment for the home purchase. Believe it or not, sellers generally prefer buyers who have higher down payments—or better yet, cash to buy the home.
The reason why is simple. When you are buying a home using a mortgage loan, there is always the chance that lenders may change their minds at the last minute. This means low down payment offers tend to be unnecessarily risky. No one wants to have to start the sales process over again.
As a result, a high down payment is a sign of a more secure transaction. That will always remain more attractive to people who want their home off the market fast.
Disadvantages of a Large Down Payment
Is a bigger down payment always better? Not necessarily. Here are some things to consider before you put down a high down payment on a potential house:
- You may not be able to afford it. Putting together that money is not an easy feat. It takes a lot of saving time to keep 20 percent of a typical home at hand. This may leave you out of the market to buy a home if you wait long enough. By the time you save up, it may not be enough of a down payment for the same type of home you wanted.
- It may not be necessary. If you are a veteran, VA loans require no money down. Even if you can’t get a VA loan, an FHA loan may still make it possible to get a home with as little as 3.5 percent down. If you are like many first-time homebuyers, it may make more financial sense to use a VA loan or FHA loan so that you actually get your foot in the door.
- Less budget flexibility. A high down payment may be great for your home, but what happens if you lose your job? That’s what often happened in 2008, and that led to foreclosures. A large down payment is not worth risking an empty savings account, or worse, an empty investment account.
- Retirement issues. If you are taking out a 401(k) loan, then you may have a hard time once your retirement hits. Too much investment removed can end up harming your retirement fund later on in life.
Average Down Payment on a House for 2022
The average down payment on a house is smaller than you think. Did you think that most people put 20 percent down or more? You are not alone, but that’s far from the truth. The NAR reports that the average down payment for a home is only 12 percent—and that’s entirely across the board.
Age is a factor in how much of a down payment people have. For people under 30, the typical down payment for a home is only six percent of the asking price. People above the age of 65 could put down as much as 20 percent or more on average.
There are different ways to calculate your down payment, so it’s good to read up on which method you should expect to use.
Average Down Payment on a House for a First-Time Buyer
The average down payment on a house for a first-time buyer is only six percent. Shocked? Many people are. It’s easy to see where first-time homebuyers may be concerned about being unable to buy a home due to issues with down payments.
Part of the reasons for such a surprisingly low down payment average deals with the many loans and programs geared towards first-time homeownership. New buyers are often still getting their financial footing underway, so the government does what it can to ensure new buyers aren’t priced out of the market.
Once they build equity, they can generally use that equity to get a better house with a higher down payment. This, in turn, increases the typical down payment a homebuyer has.
Minimum Down Payment on a House for a First-Time Buyer
The minimum down payment on a house for a first-time buyer can be zero. However, the true minimum you can put down depends on which program you use to get a home. Only a handful of financing programs allow for a “no money down” type of mortgage.
The United States tries to be amenable to first-time homebuyers who are either veterans or are looking into buying rural homes. VA loans and USDA allow you to get a home with no money down, while FHA loans offer you the opportunity of homeownership via a 3.5 percent down payment.
VA loans are known for being available exclusively to veterans, while USDA loans are only for people who want to buy in rural (or sometimes suburban) regions. FHA loans, however, are generally open for almost anyone who is buying a house for the first time.
The minimum down payment for a first-time home depends on the type of loan you get. Here’s a quick run-through of the most common types of loans:
- FHA Loans: 3.5 percent. By and large, the most popular way to afford a first-time home, FHA loans are an excellent choice for people who want to have a lower down payment but can’t quite qualify for a HomeReady or USDA loan.
- VA and USDA Loans: 0 percent. Veteran loans and USDA-approved home loans can be done with no money down. USDA loans can be obtained by low and moderate-income families who want to move to approved areas.
- HomeReady/Home Possible: 3 percent. Certain Fannie Mae and Freddie Mac programs, such as HomeReady and Home Possible, can allow you to get a home.
- Conventional Loans: 20 percent. Also known as traditional loans, conventional loans require a minimum of 20 percent in most situations.
It’s important to note that putting the minimum down is not always the best idea. Most of the time, the minimum is a starting point for figuring out the best down payment for your financial situation—not the ideal amount to offer.
The Bottom Line: Should I Put a Large Down Payment on a House?
Is a higher down payment better? It really depends on you and your situation. If you can comfortably afford to get a higher down payment, then it could prove to be a smart move—especially in a hot market.
However, if you are struggling with money and want to own a home, it may not always be possible to do so. This is why most guides that involve deciding how to choose your down payment tend to leave some leeway. It’s not always realistic to continue to wait and save.
When in doubt, it’s best to shoot for a larger down payment. If that’s not always doable, working with a down payment that’s close to the national average will usually suffice.
Find out how much home you can afford today with our handy affordability calculator. To get a more accurate estimate, complete the online pre-qualification process with Guidance Residential. It takes fewer than 10 minutes from start to finish. Check it out now.
Originally published July 2020, updated July 2022.