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This article is part of our series about financial literacy. You can find the links to the other articles at the bottom of the article.
In most cases, it’s better to put down a large down payment on a house if you have the money. However, if saving up for a large down payment causes you to wait for a long time before buying, you may want to consider buying now.
There are tons of factors to consider when wondering how much of a down payment you need. We’ll dive into each factor!
With the median U.S. home price nearing $300,000, most prospective buyers must finance a purchase using a mortgage. Most types of mortgages require a down payment of between 3% and 20% based on various factors.
Aside from simply satisfying the minimum amount required, choosing a larger down payment has some potential advantages and disadvantages.
How Much Should You Put Down on a House?
A down payment represents cash paid upfront when buying a property that is usually expressed as a percentage of the home’s total price. From the perspective of a lender, a down payment is among the factors that influence their assessment of risk when making lending decisions.
A bank or other lending institution looks at several factors when determining whether to issue a mortgage to a potential borrower. Considerations include the applicant’s credit score and history, current income, existing debt, and the amount of financing necessary for the purchase.
Lenders view applicants with a poor credit score (below 620) or those with large amounts of debt relative to their income as high-risk; therefore, these individuals might need 10-15% down to be approved for a mortgage that is not backed by the government.
In this example, a motivated potential buyer may decide to begin an aggressive savings plan for satisfying the minimum requirement.
Homebuyers with satisfactory credit and income are less likely to encounter large down payment requirements for approval in today’s market. Also see our How Much Credit History Is Needed to Buy a House? article for another point to consider when buying a home.
Lenders view these individuals as less risk, making them eligible for “conventional” mortgage financing with a lower 3-5% down payment requirement.
Conventional mortgages generally have lower interest rates and these borrowers are more likely to have some discretion regarding the amount of their down payment.
Conventional mortgages represent one category or type available today, as government agencies support several other types of mortgages such as FHA, VA, and USDA loans.
Aspiring homeowners will find that a mortgage calculator is a valuable tool for instantly showing the impact of changing the many variables involved such as down payments, interest rates, and term (length) of the loan.