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Coming up with a down payment can be a challenge for prospective homeowners, but many have already begun working toward that goal.
According to a new survey by Clever.com, a housing and real estate research portal, about 77% of future home buyers have already started saving money for a down payment.
The report found that more than half (57%) of potential buyers want to put down less than 20%. The survey interviewed 920 current and prospective homebuyers in early April.
Buyers may try to put more money down to avoid the cost of mortgage insurance or even lower monthly payments, but 20 percent is “definitely not necessary,” says Danielle Hale, chief economist at Realtor.com.
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In the first quarter of the year, the average down payment was 13.6%, according to Realtor.com, up from 10.7% in the first quarter of 2020.
Based on transactions from July 2022 to June 2023, the typical down payment for first-time home buyers in 2023 was 8%, compared to 19% for repeat buyers, according to a survey by the National Association of Realtors.
Even at recent high levels, the average down payment is still well below 20%, a percentage that people generally consider the gold standard when buying a home.
“This is by no means actual law,” said Mark Hamrick, senior economic analyst at Bankrate.com.
“The mystery of the real estate market”
One way to reduce your monthly mortgage payment is to put more money down and borrow less, but saving up for a larger down payment can be a challenge for many households, Hale explained.
“This clearly illustrates the dilemma of the housing market, which can hardly afford anything,” she said.
For most buyers, having enough savings for a down payment is a major hurdle. According to a 2023 CNBC Your Money Survey conducted by SurveyMonkey, nearly 40% of Americans who don't own a home cite a lack of savings for a down payment as the reason for not doing so. The report surveyed more than 4,300 U.S. adults in late August.
Most home buyers do not pay 20%
Rising real estate prices make this 20% target particularly daunting. But in reality, 20% is not necessary, experts say.
Nationwide, the average down payment on a home is closer to 10 to 15 percent, Hale said. In some states, the average is well under 20 percent, and in others, it's even under 10 percent, she added.
“Not only is it possible to buy a home with less than 20 percent down, but this data shows that the majority of buyers actually do so,” Hale said.
There are several loans and programs available to help interested buyers purchase a home by making lower down payments.
For example, the Department of Veterans Affairs offers VA loan programs that allow qualified individuals to make a 0% down payment. U.S. Department of Agriculture loans, known as USDA loans, are designed to make it easier for buyers to purchase homes in more rural areas, and they also offer the option of making a 0% down payment.
Federal Housing Administration loans, which require a down payment of just 3.5 percent for qualified borrowers, are available to first-time, low- and moderate-income and minority buyers and are “designed to address the homeownership gaps in these target groups,” Hale said.
Even with a traditional loan, the buyer's required down payment can range from 3% to 5%, depending on creditworthiness and other factors.
“There are options,” Hale said.
A small deposit may incur additional costs
When deciding how much down payment you can afford, proceed with caution: Smaller down payments can come with additional costs. While a smaller down payment is one way to “address affordability issues,” it can also create a “mixed picture,” Hamrick said.
With a smaller down payment, you'll have to borrow more money from your lender, which will increase the monthly cost of your mortgage, Hale said. A smaller down payment may also mean you don't qualify for a lender's best available interest rate.
If you borrow more than 80% of the property's value, you may incur additional costs for private mortgage insurance (PMI).
According to The Mortgage Reports, the cost of PMI can typically range from 0.5% to 1.5% of the loan amount per year, depending on various factors such as your credit score and the amount of the down payment.
For example, on a $300,000 loan, mortgage insurance premiums could cost between $1,500 and $4,500 per year, or between $125 and $375 per month, the website says.
Typically, your lender will automatically cancel your mortgage insurance once you reach 22% equity. You can request cancellation once you reach 20% equity.
In some cases, buyers may opt for what's known as a “piggyback mortgage” or take out a second mortgage to meet the 20 percent limit and avoid having to purchase mortgage insurance, Hale says.
However, the mortgage interest rate on this second loan tends to be higher, she said.