How much down payment for a house do you really need?

Most people think they need 20% down, so they wait years longer than they have to. That’s a misconception. How much down payment for a house you need depends on your loan program, and for most first homes it is somewhere between 0% and 5%. Here are the program minimums, the honest math on putting more down, the money a lender will accept, and the order I would spend it in.

How much down payment do you need? The program minimums

These are program rules, not my opinion:

Buying a 2 to 4 unit home you will live in? On a Fannie Mae loan approved through automated underwriting the minimum is 5%, and FHA’s 3.5% minimum still applies. For a true investment property, plan on 15% to 20% down in my experience, and gift money generally cannot be used for it.

How much down payment on a $300,000 or $400,000 house?

The down payment is only one bucket of your cash to close. Closing costs, prepaids and escrow come on top, and my planning number for the whole thing at 5% down is 8% to 10% of the price.

How much down payment for a house with bad credit?

On FHA, the score sets the minimum: 3.5% down at 580 or higher, 10% down from 500 to 579, and below 500 the loan is not eligible. On conventional loans, Fannie Mae and Freddie Mac no longer set a minimum score for files approved through their automated underwriting, but lenders add their own floors, and a lower score raises both the rate and the cost of mortgage insurance. Low credit is rarely the end of the conversation. What it changes is the price and the program, which is what my page on credit scores for a mortgage walks through.

3% down vs 20% down: what the extra cash buys

At 3% down on a $350,000 home you bring $10,500. At 20% you bring $70,000. That $59,500 difference lowers principal and interest by about $376 a month at an example rate of 6.5%, and it removes mortgage insurance. The insurance is the part people forget to count, so here is the comparison with it included:

Example rate of 6.5% on a 30-year fixed. PMI is from published monthly rate cards for a 740 to 759 credit score at standard coverage; a real quote can differ. Taxes and homeowners insurance are left out because they are the same in every row. At 3% down the PMI runs higher than the 5% row, because the loan-to-value is higher.

Going from 5% to 20% down costs $52,500 more cash and saves $479 a month. Divide one by the other and it takes about 110 months, a little over nine years, for the lower payment to earn back the cash. The question that decides it is how long you will keep the loan. Keep it 30 years, and more down can pay off. In my experience, though, a first home usually gets sold or outgrown within 3 to 7 years, and on that clock you never earn the cash back.

My shortcut for everything in between: every $1,000 you put down moves the payment about $6 to $7 a month. At an example rate of 6.5% it is $6.32, so $10,000 more down saves about $63 a month and takes about 158 months, over 13 years, to earn back.

The mortgage insurance is also not forever. On a conventional loan you can ask to cancel it once your balance reaches 80% of the home’s original value, and it ends automatically at 78% if you are current. On the 5% example that happens around years 10 and 11 on the payment schedule alone, and sooner if you pay extra principal or your home’s value rises, under rules your servicer applies. Here is how mortgage insurance works and comes off.

Why I default to the minimum down, with reserves first

Just because you can put more down doesn’t mean you should. On a first home I want your money flexible, not buried in the walls, and I want your reserves built before your down payment grows. The worst spot to be in is a low mortgage payment with no money behind you.

That extra $17,500 of cushion costs about $158 a month. It would take the payment difference about 111 months, more than nine years, to add up to the cash you kept. If a job loss or a new roof shows up in year two, the cash is what keeps you current. How big the cushion should be is part of my Wheel of Wealth.

There are real exceptions. If the payment at the minimum would keep you up at night, put more down or buy less house. If you already know you will keep this home as a rental when you move on, more down can make sense, since it removes the insurance and gives you a payment the rent can cover. You still have to genuinely move in and make it your home first: a primary residence loan asks you to certify that you will live there, and on the loans I close that means at least the first year.

What money can you use for a down payment?

All the money has to be accounted for. You can’t have money coming out of nowhere. These sources work when they are documented:

• Checking and savings: two months of statements, every page. Bank statements, not credit card statements.
• Money market, brokerage and stock accounts, with proof of the sale if you sell.
• Retirement accounts, through a loan or a withdrawal (more below).
• A documented gift.
• Proceeds from selling your current home.
• A draw on a home equity line against a home you own.
• A business account, only if you own 100% of the business. That is my file rule.

What does not work: unsecured borrowing, such as a card cash advance or an unsecured personal loan. In my files, borrowed money only works when it is secured by something you own, and on FHA loans the lender has to check that your deposits did not come from new debt. Cash kept at home is very hard to document, and the value of a paid-off car is not cash. Expect questions about any deposit that is not your paycheck; the rules, and how to document one, are on my list of what not to do before closing.

Can I use my 401(k) for a down payment?

Yes, but I treat it as a backstop, never the plan. My order is family help first, then borrowing, and only then pulling what the deal needs from retirement.

• A 401(k) loan borrows from your own account and gets repaid, usually through payroll. Your plan sets how much you can borrow and the repayment terms, so ask the plan administrator. On a Fannie Mae loan, the repayment generally stays out of your debt-to-income ratio once the lender has the loan paperwork, but the amount you borrowed comes off the balance that counts as reserves. Other programs can treat it differently.
• A withdrawal is gone for good. Taxes and possibly a penalty can come out of it, and that money stops compounding for your retirement. What you would owe, and whether any exception applies to you, is a question for a CPA. I’m not one.

You may not need to cash it out to show reserves, either: on a Fannie Mae loan, the full vested balance can count toward reserves while it stays in the account.

Timing matters. Don’t pull the money until we’re close, around conditional approval. In my experience, processing takes up to about five business days, and some plans still mail paper. It can be wired straight to the closing attorney or title company. The lender will want two documents: a PDF showing the money leaving the retirement account, and the transaction history for the account that received it.

Using sale proceeds from your current home

Money from selling your current home counts once the lender can see three things: the signed sales contract, a preliminary closing statement showing your proceeds, and the closing attorney or title company handling that sale. A contingent offer can lean on those proceeds. A non-contingent offer needs the money from somewhere else, and the ways to do that are on my page about buying before you sell.

Gift funds for a down payment

Most programs let family give you the down payment, and FHA also accepts a close friend with a documented interest in you. You need a signed gift letter and a paper trail, and a gift is never repaid. Everything else is on my gift funds page.

Down payment assistance in Virginia: my honest view

Down payment assistance is not my specialty. I have closed only a handful of those loans, and some loan officers live and breathe it. Will I do it if it fits you? Yes, and I will give it my best effort.

My caution is about cost, not about assistance being bad. Some assistance is a true grant that is never repaid, and much of the rest arrives as a second mortgage or a cost built in somewhere else. Ask two questions of any program: what does it cost to move in, and does it cost less over the long haul? Where assistance earns its keep is when saving the down payment and costs would take you years. Getting in sooner can beat waiting. Before any program, though, I ask about family help, because a parent’s gift adds no payment at all.

Virginia Housing’s grants, its Plus Second mortgage, the Richmond-area income limits and the state’s First-Time Home Buyer Savings Account are on my page about Virginia first-time buyer programs.

Pick the program first, because it sets your floor. Then decide how much above the floor to put down by asking one question: will this dollar do more for me in the house, or in the bank? For most first homes, the answer is the bank.