The Complete Guide To Your Down Payment Amount (Down Payment Assistance Programs Included)

TL;DR

There is no “right” down payment amount. Every buyer’s situation and location affect the amount they can put down. Given the plethora of financing options for any down payment amount, today’s home buyers put down between 0-20%.

Putting down 20% allows you to save money over time with lower interest rates & monthly payments, but while lower down payments may cost more, they make homebuying achievable for many who otherwise wouldn't be able to make a larger down payment.

Down payment assistance is a state and city-funded housing affordability initiative. Because homeownership is good for the economy, the government partners with lenders to help first-time homeowners achieve a reasonable down payment amount. These are especially helpful for moderate to low-income buyers.

What is a down payment?

Your down payment is the cash you put down to the seller when you buy the home, typically described as a percentage of the home price. The rest of the money comes from your mortgage loan.

Lenders prefer a 20% down payment, awarding those who do so with:

  • Better home loans
  • Lower mortgage interest rates
  • Smaller monthly payments

To purchase a home, you need to show you can pay this amount by providing “Proof of Funds.” This is a copy of bank statements that prove your financial ability to deliver on the transaction. Proof of Funds should show at least the amount required for the down payment.

What are my down payment options?

For those who can't put down 20%, many down payment assistant programs exist to make home loans available to every buyer. While these mortgage loans increase home affordability, they aren’t free money.

Putting down less than 20% will increase your:

  • Upfront fees
  • Ongoing interest
  • Monthly payments

This adds extra expenses to overall homeownership, yet down payment assistance is one guaranteed gateway to homeownership.

For example, say we’re looking for a $500,000 home in Los Angeles, CA.
What are the down payment options? How do these different amounts affect overall costs?

0% down payment

There are a handful of lenders who provide 0% down payment loans. To help lenders recover their money, these loans typically have high-interest rates, require large monthly payments, and incur private mortgage insurance (PMI).

What is PMI?

Private mortgage insurance is a monthly premium required of borrowers who put down any amount less than 20%. This reimburses the lender if a borrower is unable to pay (defaults) on a home loan. PMI payments range between 0.3-1.5% of the total mortgage amount per year.

Here is what you should know about 0% down payments:

  • Once you have at least 20% equity in your home, most lenders allow you to cancel PMI premiums. At an additional cost of $300-500, a private appraiser will assess your home to confirm the property has reached 20% market equity.
  • As our Nerdwallet mortgage calculator shows, 0% down on our LA home requires a monthly payment of $3,459. Included PMI is $208 and our interest rate has increased to almost 5%. The higher the interest rate, the more spent throughout the course of your loan.
  • Qualifying for 0% down interest loans requires great to excellent credit history and demonstrating that you have the means to repay the loan.
    Active or retired servicemen and women, or those who live in rural areas, have exclusive access to 0% down payment programs.

The Department of Veterans Affairs and the Department of Agriculture offer loans to aid to those who have served or who are populating remote areas. If you satisfy either of these criteria, ask your real estate advisor to connect you to the appropriate lender.

3.5% down payment

Federal Housing Administration (FHA) loans allow first-time homeowners to put down as little as 3.5%. These offer some of the lowest loan rates, helping borrowers with loans between 3.5-20% of the total down payment. To qualify, your FICO credit score must meet a minimum of 580+. Here are the facts you need to know:

  • FHA loans incur an upfront mortgage insurance premium (UFMIP), which is a one-time charge of 1.75% of the total home loan. This amount may be rolled into the mortgage amount or paid at signing.
  • Since FHA borrowers aren’t putting down 20%, they must also pay for monthly PMI. Some FHA loans require that borrowers pay PMI for the entire loan term – not just until equity reaches 20%.
  • This occurs if the loan-to-value ratio (LTV) is greater than 90% when the loan begins.

What is LTV?

Loan-to-value ratio (LTV) is the total mortgage amount divided by the home value. A good way to think of LTV is the inverse amount of the down payment.

Given a 3.5% FHA loan on our $500,000 house, the remaining loan amount is $482,500. Dividing this number by the total price returns an LTV of 96.5%, so we’ll pay $201 for PMI monthly for our entire 30-year mortgage. This adds $72,360 to the eventual home price.

10% down payment

Down payments between 10-15% qualify for more favorable loan conditions. To qualify, you’ll need a credit score of 620+. Conventional loans are available here with lower interest rates and lower monthly payments (principal), meaning you’ll save money over the mortgage term.

Even a 1% difference makes a huge difference. For example, a 30-year mortgage with 5% interest requires a monthly payment of $3,204. As we see above, an interest rate of 4% will costs $2,903 monthly. That saves $108,360 over a 30-year mortgage. Here is what you need to know about putting down 10-15%:

  • FHA loans and conventional loans are both available here. Since they’re not backed by the government, conventional loans require a higher credit score.
  • For FHA loans on a 10% down payment, a credit score can be between 500-579+.
  • We’re still under 20%, so PMI is required. But remember how LTV is the inverse amount of the down payment? At 10%, our LTV is 90%.
  • If LTV at signing is 90% or less, the borrower pays PMI for the mortgage term or 11 years – whichever comes first.
  • For our LA home, a 10% down payment of $50,000 means we only pay PMI for 11 years. When compared to putting down 3.5%, this saves $45,828 in PMI over the span of our mortgage.

20% down payment

At 20%, almost anyone can secure a mortgage. Many banks won’t give you a mortgage unless you bring the recommended amount for signing. Here are the benefits to putting 20% down:

  • Since PMI isn't required with 20% down, you'll instantly save $200-$300 monthly based on your loan amount.
  • By investing 20%, your home earns immediate equity.
  • If you want to sell anytime soon, this helps you reach the point where the home is sales-profitable.

More than 20% down payment

Aside from eliminating upfront and ongoing costs, putting down more than 20% is has additional benefits:

  • It will increase the equity of your home. If you’re moving within the next five years and it’s possible, putting down more than 20% will help you reach a profitable point of sale sooner.

  • Putting down 25% on a large loan will also get you a better interest rate. Since lenders assess your entire financial portfolio when deciding, upfront cash signals their loan is secure. Seen above, a 25% down payment earns a low 3.1% interest rate and the lowest monthly payment so far.

Down payment amount takeaways

Benefits of a high down payment include:

  • Better chance of receiving a mortgage, regardless of credit.
  • Lower upfront fees from fewer ongoing fees like PMI and high-interest payments.
  • Lower monthly mortgage payment because you’ve borrowed (and owe) less.
  • Higher home equity from the start, meaning your home is more valuable as an asset.

Drawbacks of low down payment include:

  • Higher interest rates throughout loan term, which increases the total price of the home over time.
  • Higher monthly mortgage payments.
  • Need to pay monthly for PMI and throughout entire loan term for some FHA loans.
  • Still need to save for and pay for closing costs. These can run up to 2-3% of total loan amount. For our home in LA, that’s up to $15,000 additional dollars. To minimize these costs, ask about instantly recouping 5% of the selling agent’s commission.

How does down payment amount affect interest rates?

A larger down payment minimizes interest paid per year, as shown in the monthly payment. To calculate your down payment against interest rates, use this mortgage calculator.

What if you don’t have the money for a high down payment?

If you don’t have ready cash for a high down payment, you’ve got options. Here are a few ways to raise additional funds and boost your total down payment.

Borrow money from friends and family
Mortgage lenders accept gifts from friends and relatives as part of a down payment. Within a calendar year, an individual can give another up to $14,000 without that amount being taxed. Anything in excess of this amount is subject to a 10% gift tax.

Withdraw a loan from your retirement or 401k
Prematurely taking money from retirement or 401k funds allows you access to cash but at a price. You can withdraw up to $10,000 for a down payment without a tax penalty from these accounts. However, you will be subject to income tax on any amount withdrawn. Borrowing money from your 401k before age 59.5 incurs a 10% excise tax, plus the 10% income tax.

Automate savings
If you’re automatically sending some of your monthly check to savings, you won’t spend that money and you’ll never miss it.

Carry cash only
Spend only what’s set aside by ditching credit cards and going cash-only. Allot monthly cash allowances for budgeted areas and carry only what you can afford to spend.

Assess your budget
Look at the last 6 months of your bank statements. How are you spending your money? Find places to cut back, then realign your budget with your down payment goals.

Cut back reasonably
Saving money is often about accumulating small everyday savings. Cut costs by using coupons, buying less expensive food, or eating out less. Minor sacrifices in lifestyle translate into huge lifestyle changes when you buy a home.

Negotiate your bills
You can negotiate most of your recurring monthly bills. From gym memberships to the internet, most service providers have wiggle room for their rates. Listen to personal finance advisor Ramit Sethi talk about how to negotiate your monthly payments.

What is a down payment assistance program?

Down payment assistance programs (DPA) are “soft” second mortgage loans and grants set aside by the government to assist homebuyers with purchasing. A soft second mortgage combines a government subsidized second mortgage with a traditional first mortgage. Between thousands to tens of thousands of dollars may be awarded for a down payment, closing costs, and repairs.

Expect to access 0% interest rates, forgivable loans, and deferred payment schedules.

This lowers monthly payments by deferring a portion of the total mortgage until the loan matures or the home sells. For example, consider our $500,000 home in LA.

We first secure a regular mortgage for $350,000, apply for the second mortgage for $125,000, then put down $25,000, or 5%. Our $125,000 soft mortgage doesn’t impact our total mortgage amount.

We pay monthly interest and payments only on the original $350,000, which seriously reduces our monthly costs. Once the first mortgage is paid, we then separately pay the second mortgage.

Even in pricier markets, these conditions ease financial requirements for homebuyers. Down payment assistance benefits and eligibility are based upon the median income and median home price in your area. This allows you to purchase a home in otherwise prohibitive markets.

To qualify for down payment assistance, both you and your home must be eligible.

Here are the primary eligibility factors:

  • You must qualify for a primary mortgage
  • You must complete homebuyer education
  • You must be a “first-time homebuyer” (meaning you haven’t owned a home in 3 years)
  • The homes must be for owner-occupants – not investment properties
  • A minimum primary mortgage investment is due (often as low as 3%)

Other factors influencing down payment assistance include:

  • Home sale price
  • Homebuyer income
  • Homeownership history
  • Occupation

One restriction of down payment assistance programs is the sales cap. Because DPA programs are designed at helping moderate to low income buyers, you may face limitations on who you can sell to and at what price.

If you’ve lived in your house for over 30 years and haven’t yet begun to pay the DPA mortgage, you’ll need to start paying immediately. Unless you’ve saved money, this means borrowing against your home value with a home equity loan. Fail to pay your home equity loan and you will lose your house.

Down payment assistance programs near you

To see whether you qualify for down payment assistance, start by contacting your municipal housing agency. Use this searchable DPA database to find options near you.

When meeting with lenders, bring necessary document such as:

  • Pay stubs
  • Bank statements
  • Tax returns
  • Proof of employment history

California DPA Programs

MyHome Assistance Program

The California Housing Finance Agency (CalHFA) provides a deferred-payment loan of up to 3.5% of the purchase price or appraised value of the home, whichever is lower. This amount may be used for a down payment or closing costs and may be combined with the CalHFA first mortgage loan.

To determine your eligibility, check the MyHome Assistance Program. Apply through a local loan officer.

Extra Credit Teacher Home Purchase Program

This program is reserved for the following member of California K-12 public schools, including charter, county, and continuation schools:

  • Teachers
  • Staff members
  • School district employees
  • Administrators

Depending upon the area of the home, these loans can be from $7,500-15,000. To be eligible, these may only be combined with the CalHFA first mortgage loan.

Check the full eligibility requirements here. Apply through a loan officer in your area.

Washington DPA Programs

Opportunity Downpayment Assistance Loan Program

The Washington State Housing Finance Commission (WSHFC) offers this second mortgage loan program at 1% interest, with deferred payments for 30 years on amounts up to $10,000. The Opportunity Downpayment Assistance Program may be combined with the House Key Opportunity first mortgage loan.

Depending upon the county, the maximum income limit for a 1-2 person home is between $42,500-57,600 annually. To apply, contact a participating lender.

Home Advantage Downpayment Assistance

The Home Advantage Downpayment Assistance second mortgage offers a 0% interest and 30-year deferred payment. The loan amount cannot exceed 4% of total loan amounts in all counties. This may be used with Home Advantage first mortgage program.

Qualified borrowers statewide cannot exceed an annual income of $97,000. To determine if you qualify for a needs-based program and to secure a loan, contact a participating lender.

HomeChoice Downpayment Assistance Loan Program

If you’re disabled or have a disabled family member, you may qualify for the HomeChoice second mortgage loan program. Up to $15,000 are available for a down payment is available, as is a 1% interest rate on the loan.

This is reserved for first-time homebuyers unless you’re purchasing in specific areas. Income limits vary by region between $96,000-77,100 per household.

To determine your eligibility, meet with a HomeChoice Lender.

Other Washington Downpayment Assistance Programs

Seattle ARCH provides up to $55,000 for homebuyers within the city Seattle city

Bellingham DPA provides up to $40,00 for homebuyers within the city limits of Bellingham

Tacoma DPA provides up to $20,000 for homebuyers within the city limits of Tacoma

Pierce County DPA provides up to $24,000 for homebuyers within Pierce County

Startups offering homebuyer assistance

Startup companies are addressing home affordability challenges. Companies like Unison and OWN Home Finance offer buyers money for a down payment in exchange for a portion of home equity, payable at time of home sale.

For example, Unison offers up to 50% of down payment or 10% of the total home cost. When the home sells, the company retrieves an agreed-upon share of the profit. This amount currently stands at 35%.

For those unable raise the amount for a down payment, this is another option. The drawback is lower returns on home equity, so it’s not ideal for homeowners looking to sell in the foreseeable future. Better candidates include would-be buyers who plan to live in the same house for many years.

Act on facts

Down payments come in all shapes and sizes. Different homebuyers may choose different amounts, so there’s no right answer. To achieve your ideal down payment, evaluate all the options for your specific situations.

If you have enough for 20% down, you’ll achieve home equity faster and pay less over the course of your loan. FHA loans are available for as little as 3.5% payment down, meaning most buyers can afford a down payment less than 20%. These incur PMI premiums and higher monthly payments, yet allow many to finance a home who wouldn’t otherwise be able.

For those with less cash at hand, down payment assistance programs assist with the necessary funds to reach an acceptable down payment amount. Putting down more for a down payment reduces upfront costs, ongoing payments, and interest – so leverage these programs if you qualify.

To start your journey, evaluate where you want to buy and what fits your budget. Open Listings can connect with the right lender and help you find the right down payment to achieve the dream of owning a home.

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