How Much Money Should You Put down on Your New House?

Saving money for a down payment is one of the greatest obstacles that first-time homebuyers have to overcome. Reaching your savings goal can be challenging, but it might not be as hard as you think.

How Much Do You Really Need for a Down Payment?

Let’s start by clearing up a common misconception. You might have heard that you must put down at least 20% of the purchase price. That’s not true. That used to be standard practice, but nowadays, you can buy a house with a much smaller down payment (and sometimes with no down payment at all).

If you take out a conventional loan, the lender will probably require you to put down at least 3-5%. With a down payment below 20%, you’ll have to buy private mortgage insurance to protect the lender in case you don’t keep up with your loan payments. PMI premiums will be a percentage of the amount you borrow. You’ll have to pay for PMI until you have at least 20% equity.  

Government mortgage programs have different down payment guidelines. If you take out a loan through the Department of Veterans Affairs or the Department of Agriculture, you won’t be required to put any money down.

With a Federal Housing Administration loan, you’ll need a down payment of at least 3.5%. You’ll have to pay for mortgage insurance premiums, which are similar to PMI. A key difference is that you’ll have to pay for MIP for the entire mortgage term if you put down less than 10% and for 11 years if you put down 10% or more.

What Are the Benefits of Making a Large Down Payment?

The more you put down, the less you’ll have to borrow. A sizable down payment will make you less risky from your lender’s perspective and help you qualify for a lower interest rate. If you take out a conventional mortgage and put down at least 20%, you won’t have to pay for PMI. Borrowing a smaller amount, getting a lower interest rate, and avoiding PMI can save you hundreds of dollars per month and reduce your total long-term housing costs.

What Are the Downsides of Making a Large Down Payment?

A substantial down payment can save you money in the long run, but amassing a large amount will take time. You might have to wait longer than you would like to buy a house.

Owning a home is risky. The property will need maintenance and repairs, and you don’t know when a serious problem might arise. You or your partner might get laid off, or a family member might have medical expenses that insurance doesn’t cover.

Putting all the money in your bank account toward a down payment can leave you strapped for cash when you need it most. A down payment and an emergency fund should both be priorities. You’ll have to figure out how to divide your money and strike the right balance.

How Can You Save Enough Money for a Down Payment on a House?

Once you know approximately how much you’ll need, you can create a plan. If you have a long way to go to reach your target, try combining a few of these strategies:

• Increase your income by working extra hours or starting a side hustle.

• Track all your expenses and eliminate unnecessary spending.

• Reduce your current housing costs by living with a roommate or moving back in with your parents.

• Put your tax refund or bonus toward a down payment.

• Sell stuff you don’t need.

• Research down payment assistance programs in your city and state.

• Ask family or friends to give you money for a down payment as a gift.

Where Can You Learn More about the Homebuying Process?

Saving enough for a down payment is just one part of the puzzle. You’ll also have to hire a real estate agent, find a house that fits your budget, choose the right type of mortgage, and set aside money for closing costs.

It can feel overwhelming, especially if you’ve never bought a house before. Financial Freedom Voyage’s First-Time Homebuyer Masterclass will walk you through the entire process, step by step, and tell you what you need to know. The course will point out common sources of confusion and mistakes that first-time buyers tend to make.

When you pass the final test, you’ll receive a downloadable certificate of completion. You can check with your down payment assistance program, housing counseling agency, or lender to find out if it will cover the cost of the course. Click here to enroll.

Please share this blog on social media and/or send it to someone you know who is thinking about buying a house this year.