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Many Americans and first-time homebuyers might believe that the average down payment on a house is somewhere around 20%. But it turns out the typical down payment on a house may be lower than you think. As of 2021, the typical down payment is less than 20%, with the average down payment on a house for a first-time buyer currently hovering around 6-7%.
For many aspiring homeowners, the thought of coming up with a 20% down payment on a house overshadows what could otherwise be one of life’s most rewarding experiences. So, let’s dispel fact from fiction and see how much homebuyers actually need to put down to finance their first home.
The typical down payment on a house, debunked
Why do many consumers believe the typical down payment on a house is 20%? This common misconception may be due to something called private mortgage insurance (PMI).
If you're unable to put down 20% on a house, that doesn’t necessarily mean you won’t be able to get a mortgage. When taking out a conventional mortgage loan, lenders may require borrowers who put less than 20% down to pay for insurance that protects the lender in case of default. PMI is designed to counterbalance the risk presented by lower down payments and larger loans. Lenders may require PMI until the loan-to-value ratio (LTV) of your mortgage reaches 80% (meaning you have paid off 20% of the total loan or have 20% equity in your home).
Because PMI adds costs on top of routine mortgage payments, some buyers aim to put at least 20% down up front and avoid PMI altogether. This "rule of thumb” has its roots in the 2007 housing crisis to lessen the risk of people defaulting on their loans. Let’s look at where things stand now, and how buyers finance homes with down payments well below 20%.
Minimum down payment by loan type
Mortgage loans come in a variety of types, catering to borrowers with different needs and financial situations. Note that each person’s down payment will be different based on their circumstances, but there are some required minimums for borrowers to keep in mind:
- Conventional loans: As low as 3%
- VA loans: As low as 0%
- FHA loans: As low as 3.5%
In summary
The average down payment on a house is lower than many Americans might think. The oft-cited “20% rule” is a misconception, likely spurred by the fact that many lenders require private mortgage insurance when borrowers put down less than 20%. In fact, most conventional mortgages require as little as 3% down up front, meaning you may be able to start building equity sooner than you thought.
