How Much Down Payment Should a Buyer Expect to Pay?

Jul 18, 2019 by Sheila Kay

Millions of people dream about the day they become a homeowner. Often, planning begins many years ahead of a purchase. Finding a house to love is the easy part, but there are hoops to jump through before moving into the residence. Many new buyers suffer stress from wondering how much they are expected to put down on a house. Unfortunately, anxiety can sour the excitement and joy of a first home acquisition.

Purchasing a home is the biggest financial investment most people will make in their lifetime. All of the rewards of owning a home should outweigh the fear of not having enough for a down payment. As the saying goes, knowledge is power. With advance research and planning, the obstacles in the path to homeownership can be overcome.

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Down Payment Basics

In order to complete the process of owning a home, the buyer pays a certain amount to the seller to seal the deal. This cash is the down payment, which is deducted from the total cost of the house. Mortgage lenders view a down payment as proof that the buyer is invested and committed to the purchase. The balance of the purchase price is paid to the bank in the form of a mortgage loan.

The down payment is calculated as a percentage of what the home costs. If a buyer pays $10,000 on a home that costs $100,000, they have put down ten percent of the purchase price. The balance of $90,000 is financed by the mortgage lender. The interest percentage charged is based on the amount of the down payment.

Other credit purchases also require a down payment, such as auto loans. But new buyers should not confuse a down payment with a deposit. In most instances, a deposit is money paid in addition to the cost of a rental. It is paid back at the end of a term agreed to by both parties. For instance, an apartment, vehicle, or equipment rental deposit is returned at the end of the lease when the property is given back to the owner. A down payment, however, is deducted from the total price of a home or sale of other goods.

How Much to Budget for the Down Payment

There is no definite percentage that would apply to all home buyers. The amount of the down payment is based on certain variables that differ among consumers. The first consideration is the personal finances of the buyer. This includes income, savings, and assets – all of these determine how much the buyer has saved and the amount they can pay each month.

Other issues that impact the amount of the down payment include:

Credit history and score
Age of the applicant
Marital status (one or two incomes)
Purchase price of the home
How long the buyer wants to take to pay off the home

It is easier to make a decision about how much to put down on a home after carefully considering these factors. It is possible to get an idea of how much a particular lender will require up front. Mortgage down payment calculators are available online to help buyers find out about how much is needed to put down on homes they have considered buying.

Down Payments and Interest Rates

Mortgage lenders base the interest rate they charge on the amount of the down payment. The larger the down payment, the lower the interest. Paying interest over the many years that it takes to pay off a mortgage adds tens of thousands of dollars to the final cost. This is one incentive for people to try to save as much as possible for a down payment.

Some ways buyers accumulate more down payment money for their home purchase:

Saving work bonuses
Setting aside windfalls like an inheritance
Putting tax refunds in a savings account
Asking for cash gifts for special occasions to add to the savings
Working extra jobs

Not every family can save a large amount of money, despite making sacrifices. Governments recognize this reality and offer home loans to people with little (and sometimes no) down payment. For instance, the United States offers a 30-year Federal Housing Administration (FHA) loan for 3.5% down. Canada just rolled out financial assistance to first-time home buyers among its other programs. These types of programs make homeownership a real possibility for practically anyone regardless of how much they have to put down.

The 20% Rule

Twenty percent of the purchase price is considered the “ideal” down payment. But life circumstances can make it difficult to save this percentage in a reasonable time period. There are many programs to accommodate people with low income, bad credit, or little savings. Still, buyers are encouraged to do their best to pay 20% of the purchase price of a home. There are several financial benefits in addition to paying lower interest. The main perks:

They have the advantage in a crowded market since sellers prefer buyers with more money on the table.
Private Mortgage Insurance (PMI) does not have to be paid when the buyer puts down 20% or more.
The buyer pays less for the home in the end.

In a sample sale, these three advantages look like this: A buyer puts in a full price offer on a $100.000 home. The seller gets another full price offer, but accepts the bid of the first buyer. Why? The first buyer has a 20% down payment; the second buyer offered 10% down. Because of the twenty percent down, the buyer will owe a mortgage of only $80,000. The smaller interest rate he is charged will save tons of money over time. And since the cost of PMI is not added to his mortgage, his monthly payment will be lower.

Other Costs to Consider

Part of advance planning is taking into account any additional closing costs that will be necessary to secure a home. Buyers should have three to six percent of the home price on hand (in addition to the down payment) to cover these costs, which include:

The costs for inspections, appraisals, and surveys
Commissions
Lender origination fee
Document fees, such as title
Tax services

In some major cities, buyers are required to show one year of insurance and/or proof of maintenance fees in the bank at closing. It’s a good idea to include the cost of moving in the tally. Experienced buyers also add some cash for what is called a buffer, which is money set aside for unexpected issues that arise with the home after the move.

How much a buyer can expect to pay for a down payment depends on a combination of factors that are specific to each buyer. It is possible to get an idea of how much will be required by gathering extensive and accurate information prior to the potential sale. New buyers do well to get advice from experienced purchasers about preparation, how to work around negatives, and creative ways to ensure they have enough money to buy a home. With so many options currently available, buyers are bound to conquer down payment or any other challenges that stand in the way of owning a home.

Sheila Kay

Sheila Kay is an author, ghostwriter and editor residing in the Atlanta, GA area. Among her favorite writing genres are creative nonfiction, self-improvement, and finances. Her first published book, PTSD and the Undefeated Me, is a memoir which has been a stepping stone to her involvement with mental health advocacy for military and civilian men and women. She is currently working on the first fiction novel to be published under her name. For more information or to purchase her books, visit Sheila’s Author Page on Amazon.com.