I’m Not Planning to Make a 20% Down Payment on a Home Purchase. Here’s Why

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The conventional wisdom isn’t always a fit for every situation. Read on to learn one writer’s counterintuitive home-buying strategy. 

A common piece of advice you’ll encounter if you’re learning about how to buy a house is to make a down payment of 20% of the home’s purchase price. This is really great advice. A mortgage lender will be more willing to approve you for a loan because it won’t be taking on all the risk — you’ll be sinking a significant chunk of money into the purchase, so you have a lot to lose if you stop paying the mortgage. Plus, depending on the type of mortgage loan you’re getting, you might have to pay for some form of mortgage insurance if you put less than 20% down.

None of this is news to me — after all, I write about personal finance! But it’s my intention to put less down when I buy a home next year, despite the benefits of making a 20% down payment. I’m planning to put down 10%. Here’s why.

I have other costs to cover

While the down payment will be the single largest outlay of money I’ll make when buying a home, it’s far from my only expense. During the buying process itself, I’ll need to pay for a home inspection, closing costs, and possibly other expenses that come up along the way. Making a 10% down payment will leave me with enough money to cover these costs and still have breathing room.

And once I actually get into a house, the costs don’t stop there. In all likelihood, I’ll be buying an older home (since I live in a city with many of them), and even though I’ll be getting a home inspection, the odds are good that something will break and need to be repaired or replaced in short order. Putting 20% down would wipe out my savings and leave me without an emergency fund for those expenses.

I’m not thrilled at the prospect of paying for private mortgage insurance (PMI) on my conventional loan for a period of time, but it’s preferable to not having money for repairs or other costs that pop up.

How much should you put down on a home purchase?

You knew I was going to promote 20% again, right? It’s true, I am. After all, not paying for mortgage insurance will make your mortgage payments cheaper. Since mortgage rates are up these days (7.49% as of this writing, per Freddie Mac), you’re already looking at paying more per month than you probably want to.

Research from the National Association of Realtors found that since 2018, the average down payment for a first-time home buyer has been between 6% and 7%. This isn’t so surprising since a first-time buyer isn’t selling a home and using the proceeds to cover a significant part of the cost of a new one. They might also be using an FHA loan to buy a home, and these come with a down payment requirement of just 3.5% if you have a credit score of at least 580 (you have to put 10% down if your credit score is between 500 and 579).

I can’t give you a firm answer on what your down payment should be, but I encourage you to consider all the factors involved in buying a house to make your decision, like I have. If your credit score is on the lower side and you’re concerned about getting approval from a lender based on it, you might consider making a larger down payment to compensate.

What about zero-down-payment options?

It’s worth noting there are zero-down-payment mortgage loans. If you qualify for a VA home loan, a USDA loan, or any assistance programs intended to help people buy homes without a robust down payment, you should explore your options. But if you can manage to make a down payment of any size (even just 3% on a conventional loan or 3.5% on an FHA loan), it’s definitely a good idea. A lender will be more willing to approve you (and extend you a lower rate) if you’ve got some skin in the game, so to speak.

And you don’t want to end up in a situation where you owe more on your house than it’s worth. This might not be a big deal if you’re intending to stay in the home, but if you needed to sell and move in a hurry, being underwater on your loan could be a real problem. If you can’t earn enough money on the home to pay off your mortgage, you’ll still need to come up with that money. So proceed with caution when it comes to 0% down payment options.

A home purchase could be the biggest expense you ever take on, and it’s a good idea to plan on making some kind of down payment. But don’t despair if a 20% down payment just isn’t in the cards for you. Focus on improving your credit score and budgeting for all the costs of homeownership to be in the best possible shape before buying.

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