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Down Payment 101

Written by:  

Own Up Staff

Own Up is a privately held, Boston-based fintech startup that is on a mission to make sure every home buyer receives a fair deal on their mortgage by unconditionally empowering individuals with customized data, personalized advice, and unprecedented access to mortgage lenders to create better financial outcomes and simplify the home financing experience.

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A $100 bill with a blue line through it

What is a down payment?

The percentage of your home’s purchase price that you pay upfront. It is not necessary to put down 20%, but the best loan terms come with 20% or more down. If you do not put down 20%, you may need mortgage insurance.

Do you need to put 20% down?

No. For a conventional loan (a loan not backed by the government), a 20% down payment is needed to avoid private mortgage insurance (PMI). Many government-backed loans also require mortgage insurance, but the down payment amount and terms differ. The advantage of putting down 20% is that borrowers will qualify for better loan terms as lenders consider them less risky because they have more “skin in the game.” Between 2017 and 2019, about half of all buyers had loans with a 20% or higher down payment. Having 20% down is a good goal, but it is neither necessary or realistic for many buyers, given home prices in many markets.

Conventional loans require 20% down or paying PMI until the loan-to-value ratio is below 80%. For those that qualify, Government loans from programs like those listed below have more flexible down payment options and less strict credit requirements than conventional loans.

Federal Housing Administration (FHA) loans offer loans with down payment as low as 3.5%. They focus on first-time home buyers and those with lower incomes. The definition of first-time homebuyer includes someone who has not owned a home for a three-year period, a single person who previously owned a home with a spouse, and a person who previously owned a mobile home.

VA loans from the U.S. Department of Veteran’s Affairs offer home loans with little or no down payment for current and retired military members.

USDA home loans are for people buying a house in rural areas. They have an income limit and require no down payment.

Home Ready/Home Possible loans from Freddie Mac and Fannie Mae are for low- and moderate-income families making less than 80% of the area median income. The down payment is as low as 3% and reduced mortgage insurance is possible with 10% down.

What is the average down payment?

The average down payment varies significantly based on different factors and borrower profiles.

First time buyers: The average down payment for first-time buyers in 2018 was 6%.

Repeat buyers: The average down payment for people who previously owned a home in 2018 was 16%.

Loan size: The lower the loan, the more likely the borrower puts down less than 20%. In the first half of 2019, the average loan size for borrowers putting down less than 20% was $280,260. The average loan size for borrowers putting down 20% or more was $357,650.

Average FICO Credit scores: Having good credit does not necessarily mean a larger down payment. Between 2017 and 2019, borrowers who put 20% or more down on a conventional loan had an average credit score of 748. Those who put less than 20% down on a conventional loan had an even higher credit score of 762.

Age: Not surprisingly, the younger you are, the less likely you are to put more money down. Between July 2018 and July 2019, the median down payment for buyers:

  • ages 22-29: 8%
  • ages 30-39: 10%
  • ages 40-54: 13%
  • ages 55-64: 19%
  • ages 63+: 25.5%

How do people fund the down payment?

Freddie Mac asked homebuyers how they paid their down payment. Homebuyers could check all that applied. These were their answers:

  • 70%: Savings, retirement, inheritance and other personal assets
  • 31%: Proceeds from selling another home
  • 10%: Assistance or loan from nonprofit/government agency
  • 4%: Second loans, home equity loan or equity line of credit

Prospective homebuyers say the down payment is the biggest hurdle to homeownership, but may not know there are programs available that are administered by local nonprofits and other state organizations to help fund the down payment. These include the Community Seconds Program by Fannie Mae and the Affordable Seconds Program by Freddie Mac. Qualifications for these programs are income-based, but for those who do qualify, it is possible to get a mortgage with little or no money down.

How can you put down less than 20% and avoid PMI?

Buyers can use subordinate financing (the financial jargon for a second loan) to borrow the funds needed to reach the 20% threshold. Commonly they are either a fixed-rate loan or a home equity line of credit (HELOC). In some instances, these second loans can offer better terms than PMI, but will likely have interest rates higher than the primary mortgage.

A common structure for subordinate financing is 80-10-10, with 80% provided by the first mortgage, the first 10% funded by the second mortgage and the final 10% is the borrower’s down payment. Another option is 80-15-5, which involves a larger second mortgage and lower down payment.

When is 20% not enough?

While many single-family homebuyers put down 20% or less, there are many situations where a larger down payment is required. These include second home purchases, investment properties, multi-family units, and co-ops.

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The information provided to you in Own Up blog is intended to be for general informational and educational purposes only and does not constitute legal or tax advice. This blog is not a substitute for obtaining legal or tax advice from a qualified professional. The views and opinions expressed on this blog are solely those of the authors and do not necessarily reflect the official policy or position of Own Up or describe Own Up's business model. Own Up makes no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to the blog or the information, products, services, or related graphics contained on the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk.