We Asked 4 Real Estate Pros to Debunk This Major Down Payment Myth — Here’s What They Said

published Oct 30, 2024
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Check out our deep dive into The State of Home Buying in 2024 to see what you can expect in today’s real estate market. This content is presented by Homes.com; it was created independently by our editorial team.

Figuring out how much money you need to buy a house is tricky. From a down payment to inspection and lawyer fees, purchasing a home requires you to write a lot of checks (or make multiple money transfers) in a very short amount of time. So, you want to know all of the up-front home-buying costs before diving in — but it turns out most buyers are not prepared for every expense in the home-buying process.

In fact, in Apartment Therapy’s recent survey of real estate professionals and homebuyers, 80% of the selection of real estate experts we surveyed said that buyers are least informed about “how much money you need in addition to a down payment.” Almost a third (31%) of recent homebuyers we surveyed agreed with that statement. 

Those extra costs are a big surprise if you go into the home-buying process thinking you only need a down payment to become a homeowner, especially if you only saved with that in mind.

To break down exactly how much money you need up front to buy a home in 2024, I asked four real estate experts about the specific expenses homebuyers should prepare for and how much money they should have saved.  

How much money do you need for a down payment?

If you’re in the market for a home, you’ve likely been saving for a while and have an idea of how much money you’d like to put down. If you’re thinking 20%, you’ll be happy to know you might be able to save far less than that. As you get closer to purchasing a home, here’s what real estate experts say you need to know about how much cash you should have available.

What to Know About 20% Down Payments

You’ve probably heard the rule that you need a 20% down payment to buy a house. Using the Federal Reserve Bank of St. Louis’ (FRED) $420,600 median U.S. new home sale price as of August 2024, a 20% down payment would be $84,120

If you think that sounds unattainable, you’re not alone. 

“Trying to reach a 20% down payment is often unrealistic,” says Keith Gumbinger, a New Jersey-based mortgage expert and vice president of mortgage research firm HSH.com. He adds that even if you’re following an aggressive savings plan, going from zero to $84,000 could mean “saving $1,000 per month, every month, for the next seven-plus years.” (That’s two years longer than respondents in Apartment Therapy’s survey saved for — recent buyers saved for an average of five years.)

Plus, a 20% down payment looks different across the U.S. In the second quarter of 2024, median home prices were significantly higher in the Northeast and West, according to the FRED report on one-family homes.

  • The median home price in the Northeast was $701,500 ($140,300 for a 20% down payment).
  • The median home price in the West was $537,100 ($107,420 for a 20% down payment).

If you’re in a high-cost state, you could pay even more. For example, California saw a median home sale price of $868,150 in September 2024 — 20% down would cost you $173,630

Rene Ramos, a mortgage broker at C2 Financial Corp. based in Washington, says that if you can afford 20% down, it’s a good idea to pay it. “A higher down payment leaves the impression to a seller that the buyers are in a strong financial position and serious,” adds Sean Adu-Gyamfi, a broker with Coldwell Banker Warburg in New York City.

How to Put Down Less Than 20%

With rising home prices, Gumbinger has found that first-time buyers consider saving for a down payment to be “the most significant hurdle to homeownership.” That might be why the recent buyers Apartment Therapy surveyed (excluding those who bought their homes outright) put down an average of 17.38%, and nearly half of those buyers put down 10% or less.

The days of putting 20% down are “long gone,” according to Chenine Lozano, a mortgage broker and adviser based in California. She explains that VA or USDA loans allow for 0% down, while Conventional 97 loans require 3% down for first-time homebuyers.

“I would say more people are just doing their absolute best to come up with 3%,” Ramos says. “Most buyers look to accumulate just enough to get into the market — a 5% down payment and enough funds to cover loan costs — and then jump in if they can,” Gumbinger adds. Almost 30% of recent buyers in Apartment Therapy’s home-buying survey put down 5% or less.

“Most first-time borrowers need to plan for a minimum of 3% down, as this is the lowest down payment allowed by Fannie Mae and Freddie Mac for certain programs,” Gumbinger says. “More likely, a borrower will need at least 3.5% down (Federal Housing Authority (FHA) loans) or 5% for conventional conforming loans,” he adds.

Based on the $420,600 median U.S. home price, 3% down would be $12,618, and 5% down would be $21,030

Paying less than 20% down is a great way to become a homeowner, but keep in mind that there are instances when you can’t dip below that. For properties like co-ops, smaller down payments aren’t an option. “[They] require at least a 20% down payment, even if they are first-time home buyers,” Adu-Gyamfi says.

Will you have to pay for private mortgage insurance? 

If you put down less than 20%, private mortgage insurance (PMI), which protects the lender if you default on your loan, is added to your monthly payment. 

“If you have good credit, private mortgage insurance is going to be very affordable, and I’ve seen [it] as low as $70 to $120 a month for well-qualified buyers,” Ramos says. “It’s when your credit isn’t so great that you should expect to pay a little bit more in private mortgage insurance.”

Your rate will depend on what Gumbinger calls a complicated intersection of your debt load, how many borrowers are on your loan, the loan-to-value ratio (for example, if you put down 3%, you have a 97% loan), your type of loan, and some other factors. 

According to Freddie Mac, “you can expect to pay approximately between $30 and $70 per month for every $100,000 borrowed.” Freddie Mac also provides a PMI calculator on its website, but you should talk with your lender to better understand your actual costs.

If you have an FHA loan, you won’t pay for PMI, but you’ll pay a similar cost known as a mortgage insurance premium (MIP). That MIP percentage will range from 0.15% to 0.75% of the outstanding loan balance, per NerdWallet. According to the FHA, the MIP for most new borrowers is 0.55%

Anyone with an FHA loan also pays a 1.75% standard premium. According to NerdWallet, you can cover that 1.75% fee in your closing costs (if you have the cash on hand), or you can roll it into your total loan amount.

What should you know about closing costs?

If you’re unfamiliar with the home-buying process, expenses like an inspection, deed fees, and more could add up to a hefty sum you weren’t prepared to pay. “The biggest mistake I see buyers make when budgeting for cost is sometimes they’re not aware that there are closing costs,” Lozano says. 

Closing costs are fees a buyer pays throughout the closing process, according to Freddie Mac. They typically include things like appraisals, lender origination fees, title services, survey fees, attorney fees, underwriting fees, government recording costs, credit report fees, and tax service fees.

You should expect to pay between 2% to 5% of your purchase price in closing costs, according to Freddie Mac. 

Gumbinger recommends aiming to save for 5% in closing costs, although he caveats that percentage estimates are just that — estimates. “The percentage-based figure could be higher on a lower-cost home,” he says. “For example, let’s say that a title insurance policy might cost $1,000 — this is only a 0.33% fee on a $300,000 home but a full 1% fee on a $100,000 home, for example.”

Ramos adds that closing costs can be “tricky,” and your lender is a big determiner of fees. “You get to choose where you get your financing from,” Ramos says. “And while your agent might have a relationship with this lender, they might be more expensive than other lenders if you look out in the market.” 

Gumbinger says that while fees may vary, closing costs shouldn’t “be radically different from lender to lender for the same given property and borrower.” To get a better sense of what you might be paying, he suggests asking lenders about typical fees before you apply.

Freddie Mac also has a helpful closing costs calculator to get an idea of what to expect.

How much money do you need up front to buy a house?

Lozano explains that the combination of your down payment and closing costs is known as “cash to close.” So, now that you know all the costs you need to consider, let’s look at some real numbers.

Using FRED’s U.S. median home price, a 20% down payment, and 5% closing costs — to buy a $420,600 house, you’d need $84,120 (down payment) plus $21,030 (closing costs) for a total of $105,150 cash to close. Take that same median home price with a 5% down payment ($21,030) and 5% closing costs ($21,030), and you’d need $42,060

Again, this will vary depending on where you are in the country, so let’s look at the most expensive cost we talked about: California’s $868,150 median home price. A 20% down payment ($173,630) and 5% closing costs ($43,407) mean you’d need $217,037 cash to close. The same house for 5% down ($43,407) and 5% closing costs ($43,407) would bring the total up-front costs down to $86,814.

While your up-front costs (down payment plus closing costs) are dependent on your home price, these examples provide a good idea of how much cash you need to have on hand to buy a home in the current market.