Down Payments Are on the Decline. Is Putting 10% Down Enough?

It sure isn't cheap to buy a home, and often the biggest chunk of money you'll have to shell out in the process is your down payment. Mortgage lenders often require some kind of down payment to buy a home for a few reasons.

Your lender wants to see that you have the financial standing to make your mortgage payments, and having that down payment is proof of means to make payments going forward. It's also proof that you'll have a real financial stake in the property from the beginning, as it's a lot easier to walk away from a home purchase if you start out with little or no equity and thus have less to lose.

It's actually not the case that you have to make a 20% down payment. This idea comes from the fact that if you put less than 20% down on a conventional mortgage loan, you'll have to pay for private mortgage insurance (also known as PMI) until you reach 20% equity in the property. PMI payments generally equal 0.5% to 1% of the amount you've borrowed and are paid monthly on top of your mortgage payment. There are also other low down payment mortgage options, such as government-backed mortgages (those guaranteed by the FHA, USDA, and VA). In some cases, you may not need to make any down payment at all to get one of these.

As the housing market cools from its peak earlier in the COVID-19 pandemic, the typical down payment has decreased. Redfin reported last month that in January 2023, the median down payment for homes sold was just 10% of the purchase price. So if you're hoping to buy with less down, you're definitely not alone. Let's take a look at the perks and drawbacks of making just a 10% down payment on a home purchase.

Why you may want to buy with less down

Owning a home can be a wonderful source of stability for you and your family if you're financially and emotionally ready to buy. As such, it's likely a very appealing option to buy sooner rather than later, especially if rent costs in your area keep rising and you're tired of moving. If you can buy with just 10% down, you'll get to start building equity faster and sleep better at night knowing that your landlord won't sell your home out from under you.

If you're in the fortunate position of having enough money saved that you could make a larger down payment, you may still want to only put down 10%. A home is an illiquid asset, meaning that if you needed cash in a hurry, it wouldn't be so easy to get to it if you have a lot of money tied up in your home. For this reason, buying a home with all cash also may not be a good idea.

And what if something goes wrong with the home? If you put all your cash into a down payment and leave yourself with an inadequate emergency fund, you'll have to go into debt to pay for repairs the first time something breaks.

Why you may not want to buy with less down

Remember our discussion about mortgage insurance above? It's not just limited to conventional loans. If you get an FHA mortgage loan, your down payment requirement will vary based on your credit score (580 and above: 3.5%; 500–579: 10%). But in exchange for that lower down payment, you'll have to pay mortgage insurance premiums (MIP). One way or another, your lender will get more money out of you. And if you're in a conventional loan, that 0.5% to 1% of the home's purchase price could represent a nice chunk of change added on top of an already high mortgage payment, depending on how much your home cost.

If you end up with a VA or USDA mortgage loan, you may not need to make a down payment at all, depending on your lender and credit score. But you will still be responsible for paying upfront and possibly ongoing fees.

A major risk of making a low down payment on a home is ending up underwater on your loan. This is when you owe more than the home is worth.Since home values can and do fluctuate, it's a real possibility, especially at the beginning of your mortgage term. This only becomes a problem if you need to sell the home; if you're staying put and can afford your payments, it likely won't matter that you owe more than it's worth. Still, it's worth considering when deciding how much to put down.

Don't fall for the idea that you must make a 20% down payment to buy a home, as that just isn't true. But consider whether it might be a good idea to do so anyway.