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Buying a home is likely to be one of the largest purchases many Americans will make in their lifetime. But with the rising cost of housing, many are finding it increasingly difficult to save up enough for the 20% benchmark down payment.
Thankfully, there are still plenty of ways to purchase the home you want without having to put down a large sum of money upfront. While there has been a wave of homebuyers purchasing homes either with cash or by making a large down payment, it turns out many Americans have been putting down much less than the usual 20% of the home value upfront — even in this tough housing market.
Below, Select details what the average down payment on a home is these days, how you can tell if you have enough money to make a down payment and the best ways to save up for it.
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The average down payment on a home today
According to a recent report by the National Association of Realtors, nearly half of consumers believe they need to pay at least 16% of the home value or more for a down payment, while one in 10 think they need to pay more than 20%.
Fortunately, that just isn't the case. The report states the average down payment on a home in 2021 was just 7% for first-time homebuyers and 17% for repeat buyers.
Among the many difficulties for potential homebuyers is the fact that over the last two years, they've had to compete with cash buyers. The National Association of Realtors stated in May 2022 that 25% of buyers had enough cash on hand to purchase a house without needing any financing, essentially putting everyone else hoping to buy at an immediate disadvantage.
However, since the buying market has drastically slowed down due to elevated interest rates, homebuyers in general are now getting a better shot at landing their dream homes, regardless of the size of their down payment.
I purchased my home in Jan. 2022 with a conventional loan and a 5% down payment; I didn't experience any pushback after making a down payment that was less than 20%. By putting down a smaller amount, I can continue paying down other debt and invest for the future. That said, I'm still subject to paying Private Mortgage Insurance, or PMI, which will eventually fall off my mortgage once I hit the 20% equity mark.
Select looked at the best lenders for those who want to buy a home with a small down payment and ranked Chase Bank as the best for flexible payment options, Ally Bank as the best for no lenders fees, and CitiMortgage as the best for no PMI.
Chase Bank
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Annual Percentage Rate (APR)
Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included
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Types of loans
Conventional loans, FHA loans, VA loans, DreaMaker℠ loans and Jumbo loans
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Terms
10 – 30 years
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Credit needed
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Minimum down payment
3% if moving forward with a DreaMaker℠ loan
Terms apply.
Ally Bank
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Annual Percentage Rate (APR)
Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included
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Types of loans
Conventional loans, HomeReady loan and Jumbo loans
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Terms
15 – 30 years
-
Credit needed
-
Minimum down payment
3% if moving forward with a HomeReady loan
Pros
- Ally HomeReady loan allows for a slightly smaller downpayment at 3%
- Pre-approval in just three minutes
- Application submission in as little as 15 minutes
- Online support available
- Existing Ally customers can receive a discount that gets applied to closing costs
- Doesn't charge lender fees
Cons
- Doesn't offer FHA loans, USDA loans, VA loans or HELOCs
- Mortgage loans are not available in Hawaii, Nevada, New Hampshire, or New York
CitiMortgage®
-
Annual Percentage Rate (APR)
Apply online for personalized rates
-
Types of loans
Conventional loans, FHA loans, VA loans and Jumbo loans
-
Terms
15 – 30 years
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Credit needed
-
Minimum down payment
Terms apply.
Pros
- Citi's HomeRun Mortgage program allows for a downpayment as low as 3%
- Citi's Lender Assistance program gives eligible homebuyers a credit of up to $5,000 to use toward closing costs
- Ability to choose between fixed-rate and adjustable-rate mortgages
- New and existing Citi bank customers can qualify for closing cost discounts based on their account balance
- HomeRun mortgage program allows for a downpayment of less than 20% without PMI
- Provides homeownership education and counseling
Cons
- No options for a 0% downpayment
- Existing customers need high account balances to receive some of the highest interest rate discounts
How to tell if you have enough money to buy a home
Regardless of the size of the down payment, there are plenty of other costs that come along with homeownership, including monthly mortgage payments, property taxes, and maintenance, among others. Before you make an offer on a house, there are a few financial benchmarks you may want to hit first.
The key metric to keep in mind, though, is that your monthly mortgage payment should always be under 30% of your gross monthly income.
For example, if you wanted to purchase a $400,000 home and put down $20,000 for your down payment, you should plan on having an additional $12,000 to $24,000 set aside to cover the closing process. Assuming a 30-year fixed-rate mortgage and a 4.5% interest rate, your monthly mortgage payment with PMI will end up being roughly $2,400 — you would need to earn $8,000 a month in gross income to comfortably afford it.
Unfortunately, many Americans currently find themselves in a home that is just too expensive and stretches their budgets too thin. This term is commonly known as being "house poor," and a recent study from ConsumerAffairs states a staggering 69% of homeowners feel this way.
The best way to avoid this is to run the numbers before you buy and make sure you can meet the aforementioned criteria to live comfortably in your new home.
How to save enough for a down payment on a home
While the process of saving up for a home purchase can seem pretty daunting, there are plenty of ways to get started.
Create a budget
Once you break down your monthly income and expenses, you can figure out how much you're able to set aside each month to pay for your future home.
Open a high-yield savings account
These accounts are designed for consumers who are looking to put away money, either as an emergency fund or toward a long-term goal such as a home purchase. Some of our favorite high-yield savings accounts include the American Express® High Yield Savings Account* and the Ally Bank Online Savings Account.
Increase your income
Saving is the first step, but there's only so much you can trim back on. If saving alone isn't quite cutting it, it might be time to consider asking for a raise at work or taking on a side hustle — the side gig that helped me save up enough money for a home was freelance writing.
As your saving, prepare yourself in other ways
Simply having the down payment isn't enough. As you're saving up, do your best to maximize your credit score, begin researching where you want to buy and how much space you can reasonably afford. That way, once you find the home you want and buy it, you won't be left with an investment you can't afford.
Bottom line
Home purchases can be quite expensive after all the costs are accounted for. That said, needing to pay 20% as a down payment as a hard-rule is nothing more than a fable at this point.
In fact, you may want to consider putting down as little as possible. Yes, your monthly mortgage payment will be higher, but you may find it beneficial to have a low-interest mortgage and continue investing your money elsewhere — in the stock market or with other real estate ventures — in the meantime.
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*American Express National Bank is a Member FDIC
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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