The Highs and Lows of Down Payment: How Much Should You Put Down On A House?

How much should you put down on a house

You spend your money on so many things. Between utility bills, streaming services, rent or mortgage payments, cell phone bills, child care—there’s just not a lot of money to spare in the average budget. 

That leaves less room for saving up for something like a home loan down payment, which makes owning your own home or upgrading your home seem like a distant dream. But what if there were ways around the initial barrier to homeownership that is a down payment?

At Bison State Bank, our professional and friendly loan officers have guided thousands of clients to the home of their dreams, all with a mortgage—and a down payment—they could afford. If you’re stressing about questions like “how much should you put down on a house,” we have the knowledge and expertise to help you along the way. 

Read on to learn more about mortgage loan down payments and how much should you put down on a house. 

Finding your right down payment

Over their combined decades of lending, our loan officers have picked up a thing or two. The only universal quality we’ve found among our clients is: there is no universal quality

People could come from the same hometown and have similar-paying jobs and similar budgets, yet their financial situation is completely different. Home searches are incredibly unique situations, and your home loan solution needs to be just as custom. 

That’s why before we even talk about monthly payments or how much should you put down on a house, we want to start with an in-depth conversation about who you are and what you’re looking for. Our initial conversation with clients includes important questions such as:

  • Are you looking for a starter home or your forever home?
  • What’s your current income, and where do you see yourself with your job in the next five years?
  • Do you have children or plan on having children in the future?
  • Are you more concerned with initial down payment size or monthly payment size?

All of these factors, and more, allow us to paint a full picture of what you’re looking for in your house and what you’ll need to achieve your goals. 

Related: Assembling the mortgage puzzle

After that initial conversation, we can start to craft your home loan. Part of that is finding the right down payment for your needs.

What is a down payment?

Before answering “how much should I put down on a house?” let’s start from the very beginning. What even is a down payment, and why is it important?

Simply put, your down payment is the money required upfront for a large transaction, such as a home or car loan. The down payment comes from your personal funds and isn’t part of the initial loan you take out for your mortgage. 

Essentially, your down payment is what you can afford to put on your house before your mortgage loan covers the rest. The number most people associate with home loan down payments is 20% of your total home cost, but that’s a common misconception. You can actually get a conventional home loan for as little as 3% down if you’re a first-time home buyer. And, in certain circumstances, there are loan options where you won’t owe any down payment at all! 

Related: What is the average down payment on a house?

How does a down payment affect my mortgage?

Your down payment is the entry pass to home ownership, but it’s more than just a golden ticket. Depending on your down payment decision, you’re setting up the entire life of your mortgage. 

Since you’re paying money on the principal amount owed on your house, you’re effectively deciding what your monthly payment is with your down payment. If you choose to pay more upfront, you can actually lower how much you owe each month because the amount you have to borrow is less. And that doesn’t even factor in the cost of a mortgage insurance premium for less than a 20% down payment.

Related: What is mortgage insurance?

There is a point of diminishing returns, however. Even if you can put 20% down upfront and avoid mortgage insurance, that might not be the best option for you.

For example: Say you can afford to put 20% down on your loan but it completely drains your bank account. In this scenario, it might be more prudent to put 15% down and deal with mortgage insurance for the first portion of your loan until you reach the 20% threshold. This way you retain money to keep in your account and can still eliminate your mortgage insurance early in the life of your loan. 

Keep in mind the hidden costs

Your down payment isn’t the only money you will owe to complete your home-buying process. There are many different closing costs like inspection and appraisal fees, and processing fees owed to your lender. These costs typically add up to 3-6% of your total house purchase, which adds even more to the average down payment on a house. 

Loans and down payments

What your down payment is, and questions like “how much should you put down on a house,” all depend on the type of loan you’re using. Here is a quick look at the different types of loans and the down payments they require, if they require any at all. 

Conventional fixed loans

A conventional home loan is the most popular option for prospective borrowers. These loans have a “fixed” interest rate that doesn’t change for the life of the loan, and they come in different loan lengths like 15, 20, or 30 years. 

The longer the loan length, the less your monthly payment and the more flexibility the borrower has to increase monthly payments over their loan lifetime. Conventional loans are available for as little as 3% down.

FHA loans

An FHA loan is a mortgage backed by the United States government to help make homeownership possible for borrowers who don’t have the means for a large down payment or excellent credit. Per FHA rules, a loan can go down to a 500 credit score with a 10% down payment. However, borrowers can qualify for an FHA loan with a minimum of 3.5% down payment if they have a 580 credit score or above. 

Typically borrowers can qualify for an FHA loan with a 620-640 credit score with as little as 3.5% down. 10% down can lower the monthly mortgage insurance and reduce the amount of time that mortgage insurance will be carried on the loan.

VA loans

With a home loan backed by the Department of Veterans Affairs, our nation’s veterans can purchase a home with no down payment required at all. The VA limits an origination fee to 1% of the loan amount and has specified costs that the Veteran cannot pay. 

These are called VA allowable and non-allowable fees. The settlement fee, doc prep fees, rate lock-in fees, escrow fees (and more) can only be charged if they are included in the 1% origination fee. A VA loan also has no monthly mortgage insurance

All uniformed service members are eligible for VA home loan benefits, including members of the Army, Navy, Air Force, Marines, Coast Guard, Space Force, National Oceanic Atmospheric Administration (NOAA), the Army Reserve, and Public Health Service. There are restrictions based on time of service, which also varies based on your branch of service.

For example: National Guard members and reservists are eligible for a VA home loan if they have completed at least six years of honorable service, are mobilized for active duty service for a period of at least 90 days, or are discharged because of a service-connected disability. Learn more about restrictions and requirements for VA home loan eligibility on the VA website.

Related: More on VA home loans at Bison State Bank

USDA loans

USDA home loans are zero down payment mortgages that are eligible for people in rural areas.

These loans are issued by the United States Department of Agriculture to encourage rural development and “improve the economy and quality of life in rural America.” To qualify for a USDA home loan, you must:

  • Be a United States citizen
  • Have a minimum of 24 past months of dependable income
  • Have an acceptable credit history, with no accounts sent to collections in the previous 12 months.

Applicants with a credit score of 640 or better receive streamlined support. The biggest restriction for USDA loans is location. Most urban areas aren’t eligible for these loans, while most houses in rural areas are. There is some gray area within that restriction, however, as some suburban areas are eligible for USDA loans. You must also be below the max adjusted household income for the state and county you’re searching in. 

That’s a lot to keep in mind, but working with an experienced mortgage professional, like the ones at Bison State Bank, ensures all of your loan options are considered. 

If you’re not sure whether you qualify for any of these federal loan programs or financing options, contact Bison State Bank! Our experts can help guide you determine what programs are right for you, and even assist in the application process. 

Down payment assistance

If you don’t qualify for an option that doesn’t require a down payment, and you can’t afford even a low average down payment on a house from a conventional loan, there are down payment assistance options available. 

Down payment assistance actually refers to a variety of programs available, typically aimed at assisting first-time home buyers. These include:

  • Grants: Programs that outright give down payment money.
  • Zero-interest, forgivable loans: While labeled a “loan” in name, these loans are actually forgiven over the course of time. Typically their forgiveness term is between 5 and 7 years, and the homeowner doesn’t have to pay the loan back as long as they remain in the home until after that period passes.
  • Low-interest loans: These loans, as the name suggests, contain a very low-interest rate and can be repaid over time, typically in increments of 10 years. They help make homeownership more attainable by spreading the hefty up-front cost out over several years. 

Most of these down payment assistance programs are made for first-time home buyers, but many are eligible for repeat home buyers as well. Even if a program is labeled for first-time home buyers, you’re not necessarily counted out if you’ve owned a home previously. These programs usually define “first-time home buyers” as someone who has not owned a home in the last three years. 

Turn to Bison State Bank for your down payment guidance

All of this nuance is why you need an experienced guide to talk you through the home buying journey. If you’re stuck with questions like how much should you put down on a house, the home loan professionals at Bison State Bank have the knowledge you need to set you on the right path. 

Unlike other online mortgage lenders, our loan officers won’t try to fit you into a loan that’s not right for your situation. We are seasoned professionals in this industry with the experience needed to guide clients to their best down payment options. The end result leaves them satisfied with their purchase and confident in their decisions.

Contact us today to see how our honesty, integrity, and experience can help find you the right home loans.

A special thank you to our Director of Training and Development Originator, Emily Sappingfield, for providing her expertise on this topic.