Your Top 11 Questions About Down Payments, Answered (Including: What’s an Average Down Payment?)

Just the words alone are enough to increase your heartbeat and cause anxiety — down payment. Almost everyone who hears the term knows it often involves a large sum of money, one that may feel beyond reach, but many do not know exactly what a down payment entails. What is an average down payment for a house, anyway?? Does it really have to be 20%? When do you actually put down said payment?

A down payment is money that a buyer will pay at closing, usually expressed as a percentage of the home’s total purchase price. In other words, a down payment isn’t a random number pulled out of thin air that you hope sounds impressive. Research and strategy are involved when deciding on a figure for a down payment, which will depend on your savings and how much you’re willing (and able) to finance.

We’ll tackle the top questions about down payments — including that one about an average down payment for a house — so you’ll be better able to assess the right amount for you.

1. What is an average down payment for a house?

The median down payment for a house is around 12% for all buyers, 7% for first-time buyers, and 17% for repeat buyers.

Down payment amounts have trended downward compared to 1989, when the median down payment for all buyers was 20%, with first-time buyers putting down 10% and repeat buyers putting down 23%.

Average down payments also vary by state. Rhode Island, Washington, D.C., and Hawaii currently take the lead for highest average down payments, while Montana, West Virginia, and Vermont have the lowest. Agents say the ongoing demand for houses is being heavily driven by people fleeing more expensive areas of the country.

2. Are there different down payment requirements?

While most people have heard that 20% down is some kind of standard, many are unaware that it is possible to buy a home with as little as 3% down — or even no money down, depending on the loan requirements.

Before diving into loan options, make sure you know how much you can actually afford with the income you currently have. You can also explore down payment assistance (DPA) programs available — there are currently more than 2,000 nationwide, run by state, county, and city governments.

Most DPA programs require people to be first-time homebuyers (meaning you haven’t owned a home for the past three years) with qualifying credit scores and who earn what is considered a low- or median-level income. With so many DPA programs, you’ll want to consult with someone who will know them best — your loan officer.

3. What types of mortgage loans are there?

Down payment requirements differ depending upon the loan types. These are the most common ones.

Conventional loans

A conventional loan is one that is privately backed and is not guaranteed or insured by the federal government. Typically, to get a conventional loan, you’ll need a credit score of at least 620, and a down payment of at least 5% (though some first-time buyers can put down as little as 3%).

There are two types of conventional loans — conforming and nonconforming.

Conforming loans can be bought by the government-sponsored enterprises (GSEs) Freddie Mac and Fannie Mae, and therefore have to meet their loan standards. For example, all conforming loans must meet  loan limits set by the Federal Housing Finance Agency (FHFA).

As of mid-2021, the conforming loan limit was $548,250 in most areas. Anything above that limit in your area would require a jumbo loan.

Jumbo loans

A nonconforming conventional loan is, you guessed it, one that does not conform to GSE standards.

The most common type of nonconforming loan is a jumbo mortgage, which exceeds the limit for conforming loans.

For these larger loans, borrowers will often have to put down a minimum of 10%. Twenty percent is also common but not required. Some jumbo down payments can start at 5%, depending on the mortgage company you work with. Additionally, lenders may require up to a years’ worth of cash reserves to qualify for a jumbo mortgage.

FHA loans

A Federal Housing Administration (FHA) loan is a government-backed mortgage loan. Lenders are protected with these loans because the FHA will spring into action if the borrower stops making payments on the loan.

These loans are designed for low-to-moderate-income borrowers. The minimum down payment is 3.5%. To qualify, your credit score will need to be at least 580. If it’s between 500 and 579, you can still get an FHA loan, but you’ll have to make a 10% down payment.

All FHA loans require a mortgage insurance premium (MIP), which is an upfront payment made at closing when you take out the loan. You will also have to pay annually for mortgage insurance for the lender; the payment amount depends on the details of your loan.

The upfront payment is typically 1.75% of the loan, while the annual mortgage insurance fee depends on factors such as how much is borrowed and your down payment size. Mortgage insurance may not be permanent, however, and if you put a minimum of 10% down, it will expire after 11 years. If you put down less than 10% on a FHA loan, you will have to pay mortgage insurance until you sell, refinance, or pay off your mortgage.

USDA loans

The U.S. Department of Agriculture (USDA) loans do not require any down payment and are geared towards low-to-moderate-income rural homebuyers. That said, the USDA’s definition of “rural” is pretty flexible — you might be surprised to see how many suburban homes qualify!

There are three kinds of USDA loans: Guaranteed USDA Loans (loans from approved lenders that are guaranteed by the USDA), Direct USDA Loans, and housing repair loans and grants.

VA loan

Home loan benefits and housing programs offered through the U.S. Department of Veterans Affairs (VA) are for eligible service members, veterans, or surviving spouses. While the VA does not set a minimum credit score to be eligible for a VA loan, lenders typically will, with most requiring a 620 mortgage credit score to get a loan.

VA home loans are provided by private lenders, such as banks and mortgage companies, and there is no down payment required. Once you’re in your new home, if you’re thinking about remodeling or repairs, a VA refinance loan also allows eligible borrowers to take cash out up to 100% of their home’s equity to pay for renovations such as new kitchens or a new addition.

4. What about the 20% down rule?

You probably have always heard that 20% is what you’re supposed to put down for a house, but this isn’t always the case. Your comfort level with your savings account will play a big role in determining home financing. Putting down more money upfront means a smaller mortgage loan and less interest over time, and it also gives you more equity in your home right away, but it means that more of your savings will be locked up in your house (figuratively).

Richard Helali, mortgage sales leader at HomeLight Home Loans, advises that if you’re able to put 20% down, and will still have funds left over to cover potential repairs or upgrades, it may be worth avoiding mortgage insurance (MI). MI protects the mortgage lender should you stop making payments on your mortgage loan.

“Although it is convenient to have mortgage insurance, because you’ll come out of pocket for less, always remember that the mortgage insurance you’re paying for is an insurance policy to the lender,” Helali explains.

“So, if you stop making loan payments, the insurance company will pay out to the lender, and that lender will be covered from losses.”

5. If I have 20% to put down, should I — or should I put down less and save some money?

On the flip side, if putting 20% down means draining your savings account and living paycheck-to paycheck for the foreseeable future, it’s probably best to avoid it. You always want to make sure that you have money left over so you’re not house poor and can afford not only repairs, but closing costs, homeowners insurance, and property taxes.

It is recommended to have anywhere between 3 and 6 months of living expenses saved, but it’s ultimately a personal choice.

6. What is more important when homebuying: The neighborhood or the house?

Helali says this is more of a personal opinion, with some wanting to spend a little less to live in a more affordable area while others will want to spend more for a different neighborhood.

“A real estate agent will typically tell people: ‘Don’t buy the most expensive home in a neighborhood and don’t buy the cheapest home in a neighborhood,’” Helali adds.

“When you’re considering buying, it’s easy to get caught up in the moment. But then you also don’t want to have buyer’s remorse.”

Helali stresses that a good real estate agent will be there for you to help guide you through homebuying decisions to help you avoid second guessing yourself.

“They’ll say, ‘Give me a list of what you like and don’t like about the property and let’s talk about it,’” Helali adds.

7. What are some options if I don’t have 20% to put down?

Enter mortgage assistance and grant programs — there are thousands of them. About 90% of these programs are listed on the U.S. Department of Housing and Urban Development’s website. You can search by state to see which programs are available to help narrow it down.

Helali says a particular state or county looking to attract homebuyers will offer incentives. If you’re flexible about where you’d like to move, don’t procrastinate on application deadlines. And stay current on what’s being offered, as some incentives are only for a limited time. A seasoned loan officer or real estate agent who covers a specific area should know about potential grants and gifts you might be eligible for.

There are programs enticing remote workers to relocate to certain parts of the country, including Maine, Honolulu, and Oklahoma. West Virginia’s Ascend program offers remote workers $12,000 in cash to relocate, with co-working space access and free outdoor gear rentals.

Or, if you’re super into cycling, consider a move to Northwest Arkansas, with its 162 miles of paved trails and 322 miles of mountain biking trails. Remote workers who settle here are eligible for $10,000 cash and a free mountain or street bike. If biking isn’t your thing, you can get a free yearly membership to an arts or cultural institution.

8. What is earnest money? How does it differ from a down payment?

Earnest money, sometimes called a good faith deposit, is money that accompanies your offer and tells the seller that you’re serious, or earnest, about your bid — while a down payment is part of your deal with the lender providing your mortgage loan. The earnest money deposit is usually considered part of the down payment and is typically put in an escrow account by a third party, such as the title company, as soon as the purchase agreement is signed. It’s then applied toward the down payment or closing costs at closing.

An earnest money deposit (EMD) can range anywhere between $500 and up to 10% of the purchase price in a competitive market. Typically, it is somewhere between 1% and 3% of the home’s purchase price.

Earnest money can be refundable depending on certain conditions if there are contingencies written into the purchase agreement; those might include a home not passing inspection, appraising below its sale price, or if your mortgage loan isn’t approved.

9. When is my down payment due?

After deciding on what mortgage loan or program you’ll apply for and figuring out how much your down payment will be, it’s time to actually pay it.

A down payment is usually made in two installments — earnest money and then the remaining down payment, which is made at closing.

Closing day is when loan documents are reviewed and signed. Parties may get together in person to close, in which case it will take about an hour, or your area might support mobile and online closing options. When the closing is complete, the title is transferred from the seller to the buyer, and, at long last, you’re a homeowner!

Once you officially own your beautiful new home, it’s time to envision how you’d like to furnish and decorate. This is where having that extra savings from not putting every dollar you had into a down payment will come in especially handy.

10. How much will it cost to furnish and decorate my first home?

The average person spends just over $8,000 to furnish an apartment. For a house, if you’ve purchased a 2,000-square-foot home, you may need anywhere between 10% and 50% of the purchase price to furnish it.

Remember — you don’t have to furnish and decorate every room at the same time. Keep a checklist of priorities for which rooms need to be furnished first, watch for seasonal sales, and never underestimate flea markets, second-hand shops, or even the sidewalk. You may find some gems!

11. How much should first-time homebuyers expect to ballpark for surprise repairs?

Always make sure to get a thorough inspection on a house first. For a few hundred dollars, you can do this while you’re under contract, and it can save you headaches down the line.

“A lot of times the seller might get an inspection in advance, and then provide that as part of their disclosures to any potential buyer,” Helali says. “You can look over that inspection report with your real estate agent to then get a better idea of what it all means. The inspection report might reveal the roof will soon need repairs. In this case, you might want to talk to the seller to see if they can provide some sort of credit to help cover the costs in the future.”

A homebuyer can also choose to pay for their own inspection to ensure an objective, unbiased report. Sure, you will have to fork over $300-500 for this, but the benefits will likely outweigh the cost. The inspection report will provide you with all of the information needed for negotiating price and repairs. Whether the seller or buyer does the home inspection, the report helps prepare you for the unexpected with your new home.

“Getting that inspection in advance can help you determine, along with your real estate agent or loan officer, to better understand how much money you need to be saving every single month. so you have the ability to take care of expenses when they pop up.”

Now that you have a broader scope of down payments (and how other steps in the homebuying process are influenced by it), consider yourself ready to search for your first — or next —  home!

Header Image Source: (Anton Hontar / Unsplash)