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Consumers are spending more money to buy a home — but the typical down payment is still much lower than you might expect.
The average down payment was 13.6% in the first quarter of 2024, according to a new report from Realtor.com. The average down payment amount was $26,000.
The report says both numbers are rising year over year but are below their peak in the third quarter of 2023. At that point, buyers have paid an average of 14.7%, or an average of $30,400.
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Even at recent highs, the average down payment is still well below 20%, which is what people typically view as the gold standard when buying a home.
But experts say 20% isn't always necessary.
There are plenty of reasons people gravitate toward the idea of putting down 20%, such as trying to avoid mortgage insurance or reducing monthly payments, said Mark Hamrick, chief economic analyst at Bankrate.com.
“But that is by no means the law of the land,” Hamrick said.
A 20% reduction is “definitely not required.”
One way to reduce your monthly mortgage payments is to save more money and borrow less. But trying to get a higher down payment can be difficult for many families, said Danielle Hale, chief economist at Realtor.com.
“It really illustrates the dilemma that the housing market faces where there is not a lot of affordability,” she said.
Saving enough money for a down payment is a big hurdle for most buyers. Nearly 40% of Americans who don't own a home cite a lack of savings for a down payment as a reason, according to the 2023 CNBC Your Money Survey conducted by SurveyMonkey. More than 4,300 U.S. adults were surveyed in late August for the report.
Rising housing prices make this 20% target particularly daunting. But the truth is, you don't need 20%, experts say.
“Not only is it possible to purchase a home with a down payment of less than 20%, but this data shows that the majority of buyers actually do,” Hill said. “It's definitely not required.”
The average down payment nationally is closer to 10% or 15%, Hill said. She added that the average in some states is much less than 20%, while in others it reaches less than 10%.
Some loans and programs are available to help interested buyers purchase homes with lower down payments.
For example, the Department of Veterans Affairs offers VA loan programs that enable those who qualify to deposit up to 0%. Loans from the USDA, referred to as USDA loans, are geared toward helping buyers purchase homes in more rural areas, and they also offer 0% down payment options.
FHA loans, which can require a down payment of up to 3.5% for qualifying borrowers, are available to first-time buyers, low- and moderate-income buyers, as well as buyers from minority groups. These are “designed to help close gaps in homeownership among this target population,” Hill said.
Even with a conventional loan, the down payment required of buyers can range between 3% and 5%, depending on their credit score and other factors.
“There are options,” Hill said.
A small down payment can be a 'mixed bag'
When deciding how much down payment you can afford, tread carefully: There can be additional costs associated with smaller down payments. While a low down payment is one way to “address affordability challenges,” it can be a “mixed bag,” Hamrick said.
As your down payment goes down, you'll need to borrow more from your lender, raising the monthly cost of your mortgage, Hill said. A smaller down payment can also mean you don't qualify for the best interest rate available to the lender.
When you borrow more than 80% of the home's value, you may also face the additional cost of private mortgage insurance, or PMI.
PMI can generally cost between 0.5% and 1.5% of the loan amount annually, depending on factors such as your credit score and down payment amount, according to Mortgage Reports.
For example, on a $300,000 loan, mortgage insurance premiums could cost about $1,500 to $4,500 per year, or $125 to $375 per month, the site found.
Typically, your lender will automatically cancel your mortgage insurance once you reach 22% equity. You can request its removal after reaching 20% of the capital.
In some cases, buyers may choose to do what's called a “mortgage,” or take out a second mortgage to meet the 20% threshold and not have to pay for mortgage insurance, Hill said.
But that second loan tends to have a higher mortgage rate, she said.
Correction: A previous version of this article misstated the name of the Federal Housing Administration.
