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A down payment is your initial investment in your home, and for many would-be homebuyers, it's the most daunting hurdle. How much should you put down, and what kind of low-down-payment mortgage options could help you afford to buy sooner or expand your choices?

How much should you put down on a house?

As a homebuyer, you have a finite amount of money to work with. How do you decide how much of your savings to spend and how much to reserve? A larger down payment generally means a smaller monthly payment and more equity. A smaller down payment may mean a larger mortgage payment every month, but may also help you afford to buy a home sooner or widen your homebuying options.

Only you can decide what makes the most sense for your individual situation, but it's never a good idea to sink your entire savings into a down payment. In fact, your lender may even require you to have some money left in savings after you close. Your lender has a vested interest in knowing that you can weather an unexpected expense – it wants to make sure you can keep paying your mortgage.

When you consider how much to spend on your down payment and how much to keep in savings, think about:

  • Emergency funds (experts recommend 3 to 6 months' living expenses)
  • Immediate expenses related to buying your first home (repairs, renovations, new appliances or furniture)
  • Other investment goals (college savings, retirement savings)

Low-down-payment mortgage options

Once you determine the dollar amount you can afford (and want) to put down on a house, it's time to consider that amount in relation to home prices.

It's a common misconception that you must put 20% down on a home. If you do put 20% or more down, you won't need to pay mortgage insurance (more on that later). But you may have to save for a long time or put too much strain on your bank account to reach that threshold.

The minimum down payment most lenders allow is 3% to 5% of the purchase price of a house. For all down payments less than 20% of the purchase price, your lender will most likely require that one of these entities guarantee your loan:

  • US Department of Veterans Affairs (VA)
  • Federal Housing Administration (FHA)
  • A private mortgage insurer

Regardless of which guaranty option you end up with, your lender will review:

  • Your willingness to repay your loan, based on your prior use of credit
  • Your ability to repay, based on the amount and stability of your income
  • The amount of your investment in the property (your down payment) from savings and other sources
  • Whether the property's value and marketability provide adequate security for your loan

Here's a quick overview of each option.

US Department of Veterans Affairs (VA) loans

If you're an active member, veteran or reservist of the US armed forces, check with your lender regarding the possibility of financing a loan guaranteed by the VA. You may be able to put as little as 0% down (as long as the sales price doesn't exceed the appraised value). Borrowers don't pay mortgage insurance, but are required to pay a funding fee.

Eligibility for specific home loan benefits depends on the type and length of service. Learn more at benefits.va.gov/homeloans.

Federal Housing Administration (FHA) loans

The minimum down payment for an FHA-guaranteed loan is 3.5%, but you may be required to put more down if you have a lower credit score.

FHA financing can help homebuyers with lower credit scores get access to a home loan, as FHA loans will typically accept credit scores below 620.

FHA loans include 2 types of mortgage insurance premiums:

  • The upfront mortgage insurance premium (MIP) is 1.75% of the home loan amount. You can roll it into your mortgage (but you will of course increase your monthly mortgage payment)
  • The amount of the monthly MIP is based on how much you put down and the length of your home loan. If you finance an FHA loan with less than 10% down and a term greater than 15 years, you cannot cancel the monthly FHA insurance payment, so you'll be paying it for the life of the loan

There are certain limitations with FHA loans; check with your lender regarding these options.

Conventional loans with private mortgage insurance (private MI)

If you finance a conventional mortgage guaranteed by a private mortgage insurer, you may be able to put as little as 3% down, depending on your lender's requirements. (Full disclosure: Readynest is brought to you by MGIC, a private MI company.) While private MI insures loans with credit scores all the way down to 620, borrowers with better credit scores typically pay less for private MI on a conventional loan than for FHA mortgage insurance.

The most common private MI option is a monthly premium paid by the borrower. The premium appears on your monthly mortgage statement, but the MI does not increase your loan amount, and no additional funds are required at closing. You can usually cancel this MI coverage once your loan amount falls to 75% to 80% of your home's value (more on cancellation here).

There are other MI options to consider, including plans where you pay all or a portion of your MI premium as a lump sum either at closing or finance it into your loan amount. This option will reduce or eliminate your monthly premium. Some lenders also offer a plan where they pay the MI premium, but they may increase the loan fees or the interest rate to cover the cost.

Learn more about private MI.

Gift funds

If you're lucky enough to have family members who want to help you become a homeowner, congratulations! Just be aware of the rules that may apply to a down payment gift. It's not as simple as cashing a check from mom or dad, adding those funds to your own savings, then writing a larger check for your down payment.

Your lender will want to confirm any deposits in your account from friends or family are gifts, not loans. Why? If you get an unofficial loan to help with your down payment, you'll end up paying your mortgage payment AND a separate payment to the Bank of Mom and Dad, which could put you on shakier financial footing. And that's a lose-lose-lose for the bank, you and your unofficial lender.

Long story short: Your lender may require a gift letter – a note from the donor that says you don't have to pay the money back. If you know some of your down payment will be coming from a gift, check your lender's requirements.

Down payment assistance

In addition to low-down-payment mortgage programs, there are more than 2,500 programs across the country that provide down payment assistance to qualified borrowers. Often this assistance comes in the form of a grant or forgivable second mortgage loan – money that does not need to be repaid as long as certain conditions are met.

There are also some programs out there with special eligibility requirements. For example, you could qualify for special assistance if you belong to a certain demographic (e.g., Native American) or work for the US military or in education, law enforcement or healthcare.

Down payment assistance and mortgage insurance (both FHA and private) are not mutually exclusive. Learn more about down payment assistance on Readynest or at DownPaymentResource.com.

Down payment considerations checklist

  • Review your savings to determine how much of your own money you can comfortably afford to put down on a house while reserving funds for emergencies or other expenses
  • Consider whether you have access to any gift funds to supplement your own savings; if so, make sure to ask your lender what documentation you'll need to provide
  • Ask your lender to thoroughly explain your low-down-payment mortgage options, including VA loans (if applicable), FHA loans and conventional loans with private MI
  • Check your eligibility for down payment assistance, and talk to your lender about programs in your area