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If you’re scrolling through home listings and dreaming of a place to call your own, you probably know that mortgage lenders traditionally have wanted to see borrowers put down 20% of a home’s purchase price. But what are the benefits and challenges of a down payment that’s less than 20%? And can you purchase a home with a lot less money down (even nothing) in today’s economy?

Learn the answers to these questions and more here. This insight could help you qualify for a mortgage, and ultimately turn your dream house into a reality.

What is a Down Payment?

A down payment is an initial, upfront cash payment for some portion of the cost of the home you are purchasing. It is usually paid at the closing, with the remainder of the balance on the home paid in the form of a home mortgage loan. What portion of the home’s cost a buyer pays as a down payment can have a big impact on the mortgage loan amount, rate, and terms.

What is the Typical Down Payment on a House?

Conventional wisdom says you should buy a house with a 20% down payment. But the national average down payment on a house is actually less than 20% and it is even possible to buy a home with no money down or considerably less than 20%, as you’ll see below. First-time homebuyers are especially likely to put down less than 20%.

How Much Do I Need to Put Down on a House?

Mortgage programs that will finance your purchase with as little as 3% down can make homeownership possible even for those with smaller nest eggs. Mortgages like these can be either government-backed or offered by commercial lenders. You may also find offers that require 5% or 10% down.

When accessing these loans, it’s typically a requirement that you use the home as a primary residence. You may also encounter minimum credit score requirements to qualify; one in the 500s might qualify you for one program, while a score of 680 or higher could open other opportunities.

Of course, keep in mind that the more you pay upfront toward the cost of your home, the lower your monthly costs will likely be.

Consider Your Budget

The question of how much should you put down on a house is really a subset of a bigger home-buying question: how much house can you afford?

Many house hunters use a popular formula to determine how much to spend. They take their household gross annual income (before taxes) and multiply it by 2.5. They could also use a home affordability calculator to get a more precise estimation.

So, if your household income is $150,000, the maximum purchase price, using this formula, would be $375,000. Note that this isn’t a formula used by a lender; it’s a general rule of thumb.

A lender often wants your total housing expense — monthly principal, interest, property taxes, and insurance, plus any homeowners association fee or private mortgage insurance — to be, at most, 28% of your gross monthly income.

So, using the figure of $150,000, that would equal a maximum housing expense of $3,500 per month ($150,000/12 x 28%).

Your estimated housing payment will depend on how much of a down payment you make. Let’s say the house you want costs $329,000. If you wanted to put down 20%, you would need $65,800, plus closing costs, to swing the deal. So the first question is whether you have or can get those funds easily enough.

What if you don’t have that kind of cash for the down payment? If you could afford a smaller down payment plus closing costs and still meet the income requirements, your next step would be to see which lenders offer home loans for less than 20% down.

Understand How Your Down Payment Impacts Your Mortgage Payment

Making a down payment of less than 20% can affect your monthly mortgage costs. Private lenders that provide conventional loans to homebuyers who put down less than 20% almost always require the purchase of private mortgage insurance (PMI).

PMI, which insures the lender, adds a fee to the monthly mortgage payment.

Borrowers usually choose to pay PMI monthly, and it is included in the monthly mortgage payment. Expect to pay about $30 to $70 per month for every $100,000 borrowed, Freddie Mac says.

Once you have accumulated 20% equity in your home, you may be able to get rid of PMI as long as you have a good payment record, the property has held its value, and there are no liens on the property. This applies to borrower-paid mortgage insurance. You can’t cancel lender-paid mortgage insurance because it is built into the loan.

Estimate Your Monthly House Payment

The amount of your down payment also affects how much money you borrow to fund the total cost of a house. Plus, with a lower mortgage amount, you’ll pay back less interest over the life of the loan. Use the calculator below to test different down payment amounts and see how they would change the estimated mortgage payment.

Do I Have to Put 20% Down on a Home?

By now you’ve probably realized that you don’t have to have a 20% deposit on hand in order to buy a home. But what are the minimum down payment requirements? That depends on the type of loan you have. For those who need a boost to enter the ranks of homeownership or have an opportunity to get a dream house before they have saved 20%, lower down-payment options can be invaluable.

Conventional Loans

A conventional, fixed-rate home mortgage loan is accessible with a down payment as low as 3% – 5% for certain homebuyers. These loans typically have a term of 10, 15, 20, or 30 years.

Adjustable-Rate Mortgages (ARMs)

An adjustable-rate mortgage, combined with a down payment of 5% or more, can make homeownership possible for those with more limited savings and incomes, but it is important to plan for future cost increases. How it works: The ARM typically has a lower initial interest rate than a comparable fixed-rate mortgage. After anywhere from 3 to 10 years, the rate “resets” up (or down) based on current market rates, with caps dictating how much the rate can change in any adjustment.

Because borrowers may see their rate rise, they need to be sure they can afford the larger payments that come after the introductory years if they don’t plan to sell their house, pay off the loan, or refinance the loan.

Can You Buy a House With No Money Down?

The truth is, it is possible to become a homeowner with zero or very little money down. If you want to get a mortgage with no money down, a government-backed loan is likely your best bet.

These loans are insured by the federal government, so your lender doesn’t assume the risk of loaning money to someone who might default. They know Uncle Sam is standing behind the loan. These mortgages can be a win-win. They encourage citizens to become homeowners even if they don’t have a down payment, and they make banks more likely to lend under these no-down-payment conditions.

💡 Recommended: How to Buy a House With No Money Down

FHA Loans: 3.5% – 10% Down

Another home loan option is a Federal Housing Administration (FHA) loan. The FHA doesn’t directly make mortgage loans. Instead, certain lenders offer FHA loans that are backed by a government guarantee. Because of this guarantee, lenders will typically offer more flexible guidelines for mortgage approvals, including lower down payments.

In general, if you have a credit score of 500 to 579, the minimum down payment required for FHA loans is 10%. If your credit score is 580 or above, the minimum down payment is 3.5%.

FHA loans require an annual mortgage insurance premium (MIP) and an upfront MIP of 1.75% of the base loan amount. You can estimate the upfront and ongoing MIP with an FHA Mortgage Calculator.

VA Loans: 0% Down

If you’re a military veteran, active service member, or, in some cases, a surviving military spouse, you may qualify for a U.S Department of Veterans Affairs (VA) mortgage loan without any down payment required.

This program was created by the U.S. government in 1944 to help people returning from military service purchase homes.

Monthly mortgage insurance is not required, but some borrowers pay a one-time funding fee. For a first VA-backed purchase or construction loan, the fee is 2.3% of the total loan amount if you put less than 5% down. It’s 1.65% of the loan amount if you put 5% to 10% down.

What is the Minimum Down Payment on a House?

The average down payment falls below 20%, so if you can’t cough up 20%, you’re in good company. Use this handy reference to see which opportunity might be a good fit for your budget and lifestyle.

In general, it makes sense to put down as much as you can comfortably afford. The more you put down, the less you’ll be borrowing, which translates into more equity in the house and lower monthly payments.

On the other hand, it doesn’t always make sense to empty the bank in order to put down the largest down payment possible. That’s because you’ll likely have moving expenses, plus you’ll need to pay closing costs, which can vary by purchase price, state in which the property is located, interest rate chosen, lender processing fees, and more.

Furthermore, the home you’re moving into may need cosmetic repairs, or you may want to redecorate, add new landscaping, and so forth. Plus, you’ll probably want to keep an emergency fund to pay for unexpected costs.
If this doesn’t all seem doable, you may want to look for a more affordable house for now and save up for your dream house. Or, if you can wait a while before buying, then you can create a savings plan to build up a down payment.

Tips to Help You Save for a Down Payment

For 47% of recent buyers, their down payment came from savings (a fortunate 22% of first-time buyers used a gift or loan from a friend or relative toward the down payment), according to a 2022 National Association of Realtors® report.

Saving can be difficult, especially for first-time homebuyers. But if you are ready to be a homeowner, now is the time to get serious about saving for a down payment on your first home.

Here are steps to consider taking:

1.    Track your spending, including fixed expenses (rent, utilities, student loan and car payments, and so forth) and variable ones (like dining out, clothes shopping, and hobbies). Add expenses that you pay annually or semiannually, breaking those down into monthly amounts.

2.    Make a budget that helps you to trim unnecessary expenses. (As you do this, you might consider if it makes sense to refinance student loans or consolidate credit card debt into a personal loan.)

3.    Brainstorm ways to boost your income. Asking for a raise may be an option, or you might start a side hustle to bring in additional cash.

4.    Figure out what you can save each month, both for your down payment and to build up how much you should have in your emergency fund.

5.    Set a timetable for your plan.

💡 Recommended: First-Time Homebuyer’s Guide

The Takeaway

If you can manage a down payment but it’s south of 20%, know that you’re in good company. Finding a mortgage with less than 20% down is often doable, though fees usually come along for the ride.

Still, if you’d like to hear the jingle of house keys instead of apartment keys in your pocket, give SoFi Mortgage Loans a look.

SoFi offers a range of mortgage loans with as little as 3% to 5% down. And you can get prequalified with no obligation.

Ready to get started? It’s easy to check your rate.

FAQs

Is 10% down payment on a house enough?

For some buyers, especially first-time buyers, a 10% down payment is adequate to purchase a home. The amount a buyer pays upfront does affect their mortgage amount, rate, and fees.

Do I have to put 20% down on a house?

Many buyers purchase a home without putting down 20% of the cost upfront.

Does the down payment reduce the loan amount?

Yes, the more money you put toward a down payment, the less you need to borrow.

What is the optimal down payment for a house?

The optimal down payment for a house depends on your personal finances, the location where you are buying, and what mortgage programs you qualify for. A mortgage calculator can help you see how different down payment amounts affect a mortgage.

How would a 20% down payment affect a home loan?

Putting down 20% will help you avoid the added expense of private mortgage insurance, and, of course, the less you borrow to fund your purchase, the lower your monthly payments will be.

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Tail risk is the danger of large investment gains or losses because of sudden and unforeseen events. The term “tail risk” refers to the tails on a bell curve: While the fat middle of the bell curve represents the most probable returns, the tails — both positive and negative — represents the least likely outcomes.

When looking at the bell curve that gives the phenomenon its name, investors sometimes also refer to tail risk as “left-tail risk,” as it refers to the very unlikely and very negative outcomes on the curve.

What Is Tail Risk?

Tail risk is defined by a concept called standard deviation. As a metric, standard deviation shows how widely the price of an asset fluctuates above and below its average. For a volatile stock, the standard deviation will be high, while the standard deviation for a stock with a steady value will be low.

Standard deviation is an important number that investors use to understand how historically volatile a stock is, as well as the level of volatility they can project for it in the future. That projection is based on the underlying assumption that the price changes of a stock will follow the pattern of what’s called normal distribution.

Normal distribution is a statistical term used to describe the probability of an event, and it shapes the bell curve. If you flip a coin 10,000 times, how often will it land on heads or tails? Each time, there is a 50% probability it will land on heads or tails, and the curve describes the likelihood that those 10,000 flips will come out 50/50. The fat middle of the curve says it will be close to 50/50, but there are extremely low probabilities at the low (or skinny) ends of the bell curve that it could be more like 80/20 heads or 80/20 tails.

That approach to probability predicts that a stock selling at a mean price of $45 with a $5 standard deviation is 95% certain to sell between $35 and $55 at the close of that day’s market.

“Tail risk” is used to describe the risk that an investment will fall or rise by more than three standard deviations from its mean price. To continue the example, the hypothetical stock $45 stock has entered the domain of tail risk if, at the end of the trading day, it is priced at $30 or below, or at $60 or above.


💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.

What are Fat Tail Risks?

Unpredictable events are ironically predictable, and happen in the markets on a regular basis. And those markets, such as the one following the onset of the pandemic in early 2020, exhibit much “fatter” tails. Another period characterized by having an extremely fat tail was the 2008 Financial Crisis.

They’re called “fat tails” because the outcomes that had been on the extremes were suddenly happening, instead of the ones previously considered probable. This condition is also called by the mathematical term leptokurtosis. As a general rule, because they deviate so wildly from the expected norm, fat tail events present great risk as well as great opportunities for investors.

Tail Risk Strategy

Financial models such as Harry Markowitz’s modern portfolio theory (MPT) or the Black-Scholes Merton option pricing model, employ the assumption that the returns of a given asset will remain between the mean and three standard deviations.

The assumptions made in these long-term market projections can help with planning. But they’re not realistic about how investors receive their market returns over the long term. Rather, the bulk of their returns, no matter how diversified their portfolio, are largely the result of positive tail events. The power of tail events over long periods is one reason that experts tell investors to stay in the markets during fat-tail periods of volatility, even if it is stressful at the time.

Why Investors Hedge Tail Risks

Left-tail events also have the potential to have an extremely negative impact on portfolios. That’s why many investors hedge their portfolios against these events — aiming to improve long-term results by reducing risk. But these strategies necessarily come with short-term costs.

Downside Protection

One strategy that’s designed to protect against tail risks involves taking short positions that counterbalance the rest of a portfolio, also known as buying downside protection. For example, if an investor is heavily invested in U.S. equities, they may consider investing in derivatives on the Chicago Board Options Exchange (CBOE) Volatility Index (VIX), which correlates to the inverse of the S&P 500 index. (Using short strategies is also one way to invest during a bear market.)

Another way to hedge by buying downside protection is to purchase out-of-the-money put options. When the assets connected to these put options go down, the put options become more valuable. Granted, buying those options costs money, but it can be a strategy to consider for investors who believe the markets are likely to be volatile for a while.

Tail Risk Parity

Tail risk parity is a way to structure a portfolio based on the expectations that events that have a negative impact on one asset class will likely be a boon to others. This requires looking at each asset class in terms of how it might fare in the event of a particular crisis, and then finding an asset class that would likely do well in that same circumstance, and then keeping them in balance within your portfolio.

Managed Futures Funds

Other investors who want to trim their exposure to tail risks may invest in managed futures funds. These funds buy long and short futures contracts in equity indexes, and can thrive during times of crisis in the markets.

The Takeaway

A tail risk is the risk that an event with a low likelihood of happening will happen. And it’s something that investors need to keep in mind. There are a few different ways to mitigate the impact of tail risk in an investment portfolio, but for long-term investors, it can be helpful to keep in mind that tail risk is responsible for most returns over time.

Tail risk and fat tails may seem like granular investing terms, but they do play a role in the markets, which means that every investor can benefit from learning about them, and how they can affect a portfolio.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

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