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What is the minimum down payment for a house?

What is the minimum down payment for a house?

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If you’ve been dreaming of becoming a homeowner, one big concern may be weighing on you: coming up with the minimum down payment for a mortgage.

The median existing-home price was $352,800 in September 2021, according to data from the National Association of Realtors, and that number seems poised to jump even higher due to a hot housing market and low inventory in many parts of the country. However, you don’t have to let the asking price scare you away from looking at mortgage rates. Depending on the type of mortgage you choose and your willingness to pay for mortgage insurance, you may be able to buy a home with a small upfront down payment.

Let’s take a look at how much you really need in order to stop renting and start building equity in a home.

What is the minimum down payment for a house?

A down payment is the amount of money you contribute towards the purchase of a home. Think of it as the amount you initially put up as your share of ownership. The higher your down payment, the less you’re asking to borrow — and the lower your monthly payments will be.

Lenders require a down payment for most types of home loans, but there are exceptions for certain types of buyers. Here are the basic down payment requirements for various types of mortgages:

Loan type Minimum down payment
Conventional loan 3%-15% depending on lender and loan
Jumbo loan 20% or more depending on lender
FHA loan 3.5%
VA loan None required
USDA loan None required

Conventional loans follow guidelines set by Fannie Mae and Freddie Mac, but lenders can have their own requirements above those standards, as well. There are conventional loan options that require a down payment of as little as 3 percent, but many lenders impose a 5 percent minimum. If the loan is for a vacation home or a multifamily property, you could be required to put down more, generally 10 percent and 15 percent, respectively.

Jumbo loans, which exceed the loan limits set by Fannie Mae and Freddie Mac, tend to require a higher down payment than other kinds of mortgages. These are larger sums, hence the “jumbo” name. The minimum is usually determined by the individual lender, but it can be 20 percent, 25 percent, 30 percent or more.

FHA loans, backed by the Federal Housing Administration, are available for as little as 3.5 percent down if the borrower has a credit score of at least 580. If the borrower has a lower score (500-579), the minimum down payment is 10 percent. FHA loans have other costs, though, including an upfront mortgage insurance premium and mortgage insurance throughout the life of the loan. One option to note: If you have a low credit score today, you can consider taking out an FHA loan and refinancing into a conventional loan when your credit improves down the road.

VA loans, which are available to active-duty military, veterans and eligible surviving spouses don’t require a down payment. USDA loans also don’t require a down payment, but the borrower needs to be buying in a designated rural location to qualify. There are other fees to consider with these government-backed loans, including a VA funding fee and an upfront fee of 1 percent of the loan amount with USDA-backed mortgages.

Average down payment for a house

Now that you have an understanding of the minimum amount for a down payment, you might be thinking about another question: How much is the average down payment for a house? The most recent data from the National Association of Realtors shows that the average homebuyer makes a down payment of 12 percent. However, to get a closer look at typical down payments, consider what different types of buyers can afford.

First-time homebuyers: 75 percent of first-time homebuyers do not put down 20 percent. In fact, the average first-time homebuyer puts down just 6 percent of the purchase price.

Current homeowners: For those who aren’t new to buying a home, the average down payment is higher: 16 percent of the purchase price.

Cash buyers: Some new homeowners with deep pockets don’t bother putting down a fraction of the purchase price. Instead, they pay for the entire property with an all-cash offer. In September 2021, the National Association of Realtors reported that 23 percent of all home purchases were cash sales.

Debunking the 20 percent down payment myth

You may have heard that 20 percent is the required minimum, but that’s not the case. Twenty percent is simply how much you need in order to avoid having to pay extra for mortgage insurance. The insurance is to protect the lender — since you’re borrowing more money with less down, you pose a bigger risk.

The reality is that as home prices continue to rise, many homebuyers can’t afford to put down 20 percent. In fact, 49 percent of all buyers put down less than 20 percent, according to the most recent data from the National Association of Realtors.

If so many are buying homes with smaller down payments, where did the 20 percent down payment myth come from? It’s most likely based on Fannie Mae and Freddie Mac guidelines. To qualify for a guarantee from either of these entities, a borrower needs to either put 20 percent down or pay mortgage insurance.

Is it worth putting down 20 percent?

So, you don’t have to put down 20 percent, but should you? That answer depends on a number of factors, but the most important is your own bank account. If you are sitting on plenty of cash and putting down 20 percent won’t stress your finances, it’s a good move to avoid costly mortgage insurance payments.  However, if a 20 percent down payment will drain most of your bank account, you’ll want to think twice. Homeownership comes with loads of other expenses, and you need to be prepared for potential emergencies, too. If that means paying mortgage insurance for a while, that’s okay.

Consider some of the pros and cons about hitting the 20 percent threshold:

Down payment less than 20 percent

Pros

  • Stop renting sooner
  • Start building home equity now
  • Maintain more cash in your reserves
  • No mortgage insurance requirement
  • Lower borrowing amount means lower interest total over the life of the loan
  • Potential for lower monthly payments
  • Will qualify for better interest rates

Cons

  • Mortgage insurance payments
  • Potentially higher interest rates
  • Will not be able to buy a more expensive property
  • Larger loan balance means more interest over the life of the loan Cons
  • May drain a large chunk of your savings
  • May need more time to save enough to hit the magic 20 percent marker, which means delaying ownership

Down payment 20 percent or more

Pros

  • No mortgage insurance requirement
  • Lower borrowing amount means lower interest total over the life of the loan
  • Potential for lower monthly payments
  • Will qualify for better interest rates

Cons

  • May drain a large chunk of your savings
  • May need more time to save enough to hit the magic 20 percent marker, which means delaying ownership

What does a 20 percent down payment look like?

If you’re trying to determine what a 20 percent down payment will mean for your finances, the answer depends on where you’re looking to buy. Home values vary across the country, which means that saving up 20 percent of the purchase price in one city will be a lot easier (or harder) than in another area of the country. Consider the differences among these three markets, based on homes values in the middle of 2021:

Cedar Rapids, Iowa

  • Median home value: $188,400
  • 20 percent down payment: $37,680

Phoenix, Arizona

  • Median home value: $408,700
  • 20 percent down payment: $81,740

San Francisco, California

  • Median home value: $1,385,000
  • 20 percent down payment: $277,000

How much should you put down on a house?

It’s important to understand how much the down payment for a house will impact your payments. Consider a $300,000 home and a 30-year fixed mortgage with a 3.2 percent interest rate with different down payments:

Home price Down payment Amount borrowed Monthly mortgage payment (principal and interest)
$300,000 5% ($15,000) $285,000 $1,232
$300,000 20% ($60,000) $240,000 $1,037

The monthly mortgage payment above doesn’t include homeowners insurance, property taxes, and, for the 5 percent down payment scenario, mortgage insurance. That cost will vary, but consider an estimate from Freddie Mac that pegs monthly premiums for the above loan at $274. Making a 20 percent down payment means you won’t have to pay this added cost.

There’s another way to look at things, though. The premiums you have to pay on private mortgage insurance for a conventional loan are cancelled once you build 80 percent equity in the property. So, dealing with that extra cost temporarily can mean the difference between continuing to rent and buying your own place. Paying an extra fee is never fun, but it helps get you in a home of your own much faster.

Another important consideration: A higher down payment can get you a lower interest rate, further saving you money each month. We didn’t account for that in the example here, but it’s one more reason why a larger down payment can be beneficial.

As you think about how much to put down on your house, consider these key factors before settling on an amount:

  • Your emergency savings fund. If a crisis hits the week after you close on your home — say losing your job or receiving an expensive medical bill — will you have enough liquid savings to weather the storm? Additionally, you may have other emergencies related to the home. What if you buy it this fall and the furnace goes out this winter? Can you afford to repair it?
  • Your other monthly bills. What else are you paying for each month? Your car loan, phone service, groceries — none of these will disappear after you buy a home. Compare different down payments to get a sense of how it will impact your monthly mortgage bill and budget appropriately to make sure your income can continue to cover all of the essentials along with it. As a general rule, your monthly housing expenses should be 28 percent or less of your monthly income. For example, if you make $4,000 each month after taxes, you should aim to pay no more than $1,120 for your housing costs.
  • Your closing costs. In addition to a down payment, you’re going to need to cover closing costs, a range of fees associated with your mortgage that typically total 2 percent to 4 percent of your loan principal. Make sure that you have these funds set aside before determining your down payment.

You can use Bankrate’s down payment calculator to understand how different amounts will impact your bottom line. If you can afford a bigger down payment, remember not to stretch yourself too thin. You want to be able to enjoy living in that new house without depleting your entire savings and stressing about your finances.

How to save for a down payment

Regardless of what percentage you’re aiming to hit – 3 percent of the purchase price or 20 percent – you’ll need to put a plan in place to set aside that money. Here are some tips to focus on building up your down payment funds:

  1. Start immediately. Even if you’re still comparing mortgage offers and determining how much you really need, earmark savings specifically for your new home as soon as possible.
  2. Identify what to cut. Analyze your bank statements from the past few months to get a sense of where you can reduce spending and accelerate your savings. What can you cut? Can you eliminate some of your entertainment services?
  3. Open a separate savings account. Keeping your down payment money with your other savings could tempt you to spend it elsewhere, so consider opening a separate account specifically for your home purchase. If you can, set up regular automatic deposits from your paycheck to your savings account so you’re more likely to stick to your savings plan.
  4. Make a timeline. Once you know how much you need, look at how much you’ve already saved, and determine a timeline for when you want to achieve your savings goal. For example, if you want to save $20,000 in five years, you’ll need to save $4,000 per year, or $333 a month. You can also work the other way around and determine how much you can save each month by looking at your budget, and using that information as your timeline. Be sure to remember that home prices will be different in the future, too. They’ve been rising at a record pace recently. So, 10 percent of the median home price today may not hit that mark in three years.
  5. Research assistance programs. You might be able to save less or buy a home sooner if you qualify for down payment assistance. The federal government and local and state governments, as well as nonprofit organizations, offer these types of programs to help make homeownership more affordable. They tend to be directed toward moderate- to low-income buyers who are purchasing their first home, but there are some options for repeat buyers, as well. Some even help public service workers, such as firefighters and teachers, buy a home in the communities they serve.

Down payment FAQs

Still searching for the right answers to decide how much to save for a down payment? These frequently asked questions can point you in the right direction.

How can I avoid PMI without putting 20 percent down?

No one wants to pay extra for mortgage insurance. If you’re putting down less than 20 percent on a conventional loan, there are a couple of options. The first is lender-paid mortgage insurance, which – as it sounds – puts the lender in charge of covering those mortgage insurance premiums. However, you will still pay in the form of a higher interest rate. You’ll need to calculate what’s better for your budget: paying the PMI yourself or finding an LPMI option.

The second option for avoiding PMI is an 80/10/10 loan, which is commonly called a piggyback loan. In this situation, you can put down 10 percent and take out two mortgages. One will cover 80 percent of the purchase price, and the other covers 10 percent. You’ll never see a line item for PMI, but you will be paying back two mortgages with two sets of interest charges. You’ll also pay two sets of closing costs to cover both loans.

What’s more important: Your down payment or mortgage payment?

You might be wondering what matters more – your upfront payment or your monthly financial obligation on a home. The reality is that they are both important, and one impacts the other. The more you can put down, the smaller your monthly payments will be. However, making a small down payment isn’t necessarily a bad move. While you’ll need to spend time saving up for that big down payment, that’s a one-time cost. Your mortgage payments are going to happen every month – perhaps for the next 30 years. So, do the math to make sure you can afford that recurring bill while paying other bills and saving for the future.

Can I use a gift for a down payment?

If you can’t come up with all the money for a down payment on your own, but you have a really great person in your life who wants to help you out, you’re in luck: You can accept a financial present from someone else. However, who can give that money to you depends on the type of loan. For conventional loans, it will need to be a family member. For FHA loans, there is a bit more flexibility to use gift funds from friends, labor unions and even employers. Regardless of your loan, getting a gift isn’t as simple as cashing a check. Be sure to read the rules for using gift funds for your down payment before receiving any money.

Can a lender or seller contribute to the down payment?

One party that cannot be part of a “gift” for a down payment is the seller. They qualify as a person with a vested interest in selling the house, which excludes them from being able to write you a check. They can, however, make concessions or offer credits (typically limited to a fraction of the sales price) at closing in designated amounts to cover specific items such as repairs on the property.

Lenders can play a role in helping certain borrowers – often those who qualify as low- to moderate-income – get to the finish line via down payment grant programs and lender credits that help offset closing costs. Not every lender offers down payment assistance options, so you’ll want to ask about availability as you compare loan programs.

How does down payment affect LTV?

You’ll see a lot of acronyms when you’re trying to buy a house, and one of the most important is LTV, which stands for loan-to-value ratio. Your down payment sets your initial LTV. For example, let’s say you’re planning to put $20,000 down on a house that has an appraised value of $200,000. In this case, your LTV would be 90 percent. You’re borrowing $180,000 – 90 percent of the home’s total value. As you make monthly payments and build equity, your loan-to-value ratio will change. Once your LTV hits 80 percent, it means you have 20 percent equity and the ability to cancel private mortgage insurance on a conventional loan.

Bottom line

Don’t let the 20 percent down payment myth prevent you from becoming a homeowner. Although some loans may charge higher interest rates if you put down less than 20 percent, and you may need to pay mortgage insurance, that extra cost can be worth it to get you on your way to building equity in your own home.

 Written by  David McMillin

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BRAND FINANCE EUROPE 500 2021

BRAND FINANCE EUROPE 500 2021

Auto Brands Dominate in Europe: Mercedes & Ferrari are Continent’s Most Valuable and Strongest Among Top 500 Brands

  • Total brand value of Europe’s top 500 most valuable brands drops 10% from €1.96 trillion to €1.76 trillion during the COVID-19 pandemic
  • Automobiles is continent’s most valuable sector, accounting for 14% of total brand value in ranking
  • Mercedes-Benz is Europe’s most valuable brand, brand value nearly €50 billion
  • Ferrari is Europe’s strongest brand, boasting elite AAA+ rating
  • Banking sector takes hit, cumulative brand value down 20%
  • Changing consumer habits propel retail sector to brand value growth, with Germany’s Delivery Hero continent’s fastest-growing brand – up 148%
  • Over half of brands in top 500 hail from just three nations: Germany, France, and UK

The total value of Europe’s top 500 most valuable brands has dropped 10% during the COVID-19 pandemic from €1.96 trillion in 2020 to €1.76 trillion in 2021.

Brand Finance’s ranking has been expanded to include the old continent’s 500 most valuable brands for the first time, allowing for comparisons with the world’s two other major economies – the United States and China. The US is in a league of its own, with its top 500 reaching a total brand value of a staggering €3.40 trillion. While Europe comes in second place, the impact of the COVID-19 pandemic has undermined its standing and China is quickly catching up, with its top 500 brands totalling €1.65 trillion in brand value.

The COVID-19 pandemic has ravaged Europe and the world alike, and the impact on the old continent’s top brands cannot be ignored, with the total brand value of the top 500 ranking decreasing 10% year-on-year. The pandemic has tested the resolve of Europe’s top brands – some have truly thrived and benefitted as consumers completely shifted their habits, whereas others will be hoping that the continent’s rapid vaccination programme enables them to return to normal operations soon.

Richard Haigh, Managing Director, Brand Finance

Automobiles speed ahead as most valuable sector

Automobiles is the most valuable sector across the continent, with the 27 brands that feature in the Brand Finance Europe 500 2021 ranking accounting for 14% of the total brand value (€237.7 billion). German brands still command the auto industry across Europe, with the seven brands represented totalling an impressive €171.5 billion or three quarters of the sector’s total. Mercedes-Benz once again leads the pack as the most valuable brand in Europe, with a brand value of €49.6 billion. Volkswagen (down 1% to €40.0 billion), BMW (down 6% to €34.4 billion), and Porsche (down 5% to €29.2 billion) all claim places in the top 10 in 3rd, 5th, and 6th respectively.

Despite maintaining its position at the top, Mercedes-Benz has recorded a 16% decline in brand value this year. It has been a difficult year for most traditional car manufacturers – Mercedes included – with sales impacted by COVID-19. The iconic German marque also struggled to formulate a coherent electric mobility strategy and communicate a clear vision for its electric car models.

Volkswagen has recorded healthier results, its brand value only recording a marginal 1% drop. The brand has continued to focus on its ‘New Volkswagen’ strategy – described as a new era for the brand, as well as implementing its TOGETHER 2025+ strategy – with the ultimate aim of selling 50 different fully-electric vehicles and another 30 plug-in hybrid options. Should the brand be successful, it will overtake Tesla to become the world’s largest electric carmaker.

Ferrari is Europe’s strongest brand

In addition to measuring overall brand value, Brand Finance also determines the relative strength of brands through a balanced scorecard of metrics evaluating marketing investment, stakeholder equity, and business performance. According to these criteria, Ferrari is Europe’s strongest brand – and the second strongest brand in the world with a Brand Strength Index (BSI) score of 93.9 out of 100 and corresponding elite AAA+ brand strength rating.

Ferrari reacted proactively to the pandemic, initially shutting down production and then reopening with a focus on creating a safe working environment. This both minimised disruption and reinforced the brand’s reputation as a high-quality and responsible firm. In line with this, Ferrari ranks high for reputation in our Global Brand Equity Monitor study, particularly in Western Europe (in the top 3 of all brands researched in France, Italy, and the UK). Ferrari remains a highly desired brand, albeit aspirational rather than accessible for many.

Alongside revenue forecasts, brand strength is a crucial driver of brand value. As Ferrari’s brand strength maintained its rating, its brand value dropped only slightly, down 4% to €7.9 billion. For years, Ferrari has utilised merchandise to support brand awareness and diversify revenue streams and is now taking steps to preserve the exclusivity of the brand, planning to reduce current licensing agreements by 50% and eliminate 30% of product categories.

Banking sector down 20%

As governments scramble to stimulate economic growth in the face of the ongoing global health crisis, and profits and interest rates take a hit, it is unsurprising that Europe’s banking sector has recorded the most dramatic cumulative brand value loss among the main sectors of the economy. The total brand value in the industry has declined by 20% – from €225.8 billion in 2020 to €181.8 billion in 2021 – and three brands have dropped out of the ranking this year, bringing the total number to 53.

The UK’s HSBC is the highest ranked banking brand, but only sits in 21st spot, down six places from last year following an 18% brand value decrease to €14.5 billion. Over the last year, HSBC has had to navigate a dent in profits, lower interest rates sparked by the pandemic, political tensions between the US and China, and the uncertainty surrounding Brexit, all of which caused the brand’s profits to plunge by 65% in the first half of 2020.

Similarly, Spain’s leader in the sector, Santander, has seen its brand value go down 23% to €12.2 billion, dropping out of the top 25 this year to 26th position. Its larger presence in the South American markets has meant the risk exposure is larger than its Spanish counterparts’ and thus the turbulence of the last year has meant expected returns are less optimistic than previous years, impacting overall brand value.

Other national banking leaders from across the continent have fared slightly better, climbing the ranking despite losing brand value: France’s BNP Paribas (down 12% to €10.5 billion), the Netherlands’ ING (down 17% to €8.5 billion), and Switzerland’s UBS (down 11% to €7.4 billion) have moved up to 29th, 38th, and 51st positions, respectively.

Sber cashes in as strongest banking brand

Russia’s market leader, Sber, is the strongest banking brand across the continent and globally. The brand has successfully increased its brand strength year-on-year to reach an impressive BSI score of 92.0 out of 100 and the coveted AAA+ brand strength rating.

As the largest bank in Russia, Sber has benefitted from its stable brand and high levels of customer loyalty. These have only been boosted by the recent rebranding to consolidate its ecosystem of services – encompassing banking, health, and logistics, among others – around the Sber brand. Sber is poised for further success, as the company’s pledge to spend more on its brand in the coming year is likely to further boost its BSI score.

In our original market research, Sber consistently outperforms its peers in overall reputation and familiarity – it is widely known, always top-of-mind, and well-regarded. As a result, recommendation is high. Its ubiquitous presence and – in consumers’ eyes – by far the best digital offering ensure high mental and physical availability, which are strong foundations for brand strength.

Sber’s successful rebranding as a cross-sector tech brand can be an example to other market leaders worldwide. While some rest on their laurels and are often surprised by disruptive challengers, Sber is focused on the future, innovating and modernising with their customers’ best interests in mind.

David Haigh, CEO of Brand Finance

Retail sector posts brand value growth

Bucking the trend across Europe’s largest industries, the retail sector has recorded a 4% uptick in cumulative brand value. It is the third most valuable sector, behind autos and banking, with the 49 brands that feature accounting for 9% of the total brand value..

Unsurprisingly, various types of retailers have been impacted by the pandemic differently, as consumer habits have been forced to change. Notably, delivery apps and e-commerce platforms are among the fastest growers in the ranking this year. Delivery apps have benefited from the displacement of hospitality spend, where demand for quality food and small indulgences cannot be fulfilled by lockdown-hit restaurants and bars, with consumers turning to takeaways.

Germany’s Delivery Hero is the fastest-growing brand in the ranking, following an impressive 148% brand value growth to €3.2 billion. Similarly, Just Eat is the second fastest-growing brand, up 112% to €2.5 billion.

Nevertheless, brick-and-mortar retailers IKEA (down 13% to €15.3 billion), Aldi, and Lidl still claim the podium for the sector’s most valuable brands. The German supermarket rivals have posted contrasting results, however, with Aldi recording a 2% increase in brand value and Lidl a 14% decrease.

Aldi (brand value €13.2 billion) has embarked on a foray into the online retail space, successfully pivoting its offering in the face of the pandemic. The same strategy has not been undertaken by Lidl (brand value €9.6 billion), with the CEO of the UK arm, Christian Härtnagel, arguing the pandemic has artificially inflated demand for online shopping and that the costs are simply too high.

German brands represent a quarter of total brand value

With the nation’s 65 brands making up 25% of the total brand value in the ranking, Germany is well ahead of the pack.

France sits in second, with 91 brands featuring and their brand value equating to 20% of the total. Orange (down 1% to €16.3 billion), Total (down 26% to €15.4 billion), and AXA (up 1% to €14.8 billion) are the top three most valuable French brands, claiming 13th, 15th, and 19th spots, respectively. Orange has continued its focus on the deployment of 5G, which as of the beginning of 2021, is present in 160 cities.

Brexit puts Britain on backfoot?

Despite the UK still having the greatest number of brands represented at 101, it is the only major economy to lose brands in the ranking, with nine brands dropping out the ranking this year. After Britain’s official exit from the European Union in January 2020, the true impact of its departure is yet to be seen, especially given the pandemic turmoil of the previous year.

A total of 334 or two in three among the top 500 brands hail from the EU, a number that has dropped a considerable amount now that the UK has left.

Very few brands from Central and Eastern Europe are represented, with only 22 featured in total. The majority of these brands hail from Russia, whose 15 brands account for 2% of the total brand value in the ranking.

With over half of the brands in the top 500 hailing from just three nations – Germany, France, and the UK – the smaller economies have a long way to go to stamp their authority across the continent. The focus should be shifted towards investment in building up and supporting strong homegrown brands to expand internationally, which will in turn drive local economies forward.

Richard Haigh, Managing Director, Brand Finance

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