When buying a home with mortgage financing, the lender typically requires you to contribute a minimum amount to the deal. Known as a down payment, this out-of-pocket contribution determines how much you qualify to borrow, your interest rate and whether the lender will charge private mortgage insurance. Evaluate your eligibility for financing, your loan options and the loan that suits you best to calculate how much is needed for a down payment on a house.
Down Payment Details
With a higher down payment comes more loan options, a lower interest rate and a lower monthly payment. Lenders consider 20 percent of the purchase price a typical down payment formula for a home loan. Investing that much or more of your own money lowers the risk of default and foreclosure.
Lenders also waive private mortgage insurance, or PMI, because the sizable sum minimizes the lender's risk. Lenders require PMI to ensure repayment of their losses when borrowers default.
Basic Down Payment Calculation
To calculate a basic and typical down payment for your home purchase, assume that you find a home that costs $200,000 and you intend to put 20 percent down to get the best loan terms. Multiply 200,000 by 0.2 – 20 percent represented as a decimal – and you get a $40,000 down payment needed for the loan. Your loan amount is reduced by the down payment amount, so although you pay $200,000 for the home, you owe the bank $160,000.
Multi-Unit Down Payment
You may need to raise the down payment amount if you buy a two-unit, three-unit or four-unit property and rent it out to tenants while you live there. Lenders usually require 25 percent for riskier properties such as these to compensate for the likelihood of vacancy and maintenance or repairs, which can impact your ability to repay the loan. To calculate the higher down payment for such a property, multiply the purchase price by 0.25.
Boosting Your Eligibility
You may need to increase your down payment to boost your eligibility for a home loan. For example, if you don't have enough income to support the monthly payment on a loan with 20 percent down, increase the down payment sufficiently to reach an acceptable monthly payment amount. This also might be a sign that you're out of your price range, so consult with a financial professional before you agree to max out your reserves to make a higher down payment.
Low Down Payment Loans
Lenders and government programs offer loans requiring down payments of much less than 20 percent. The Federal Housing Administration (FHA) offers the most popular of these programs and insures lenders against default with just a 3.5 percent down payment. The FHA charges an annual and upfront mortgage insurance premium for all borrowers, which increases your monthly payment and closing costs. However, the upfront charge may be added to your loan balance.
To calculate an FHA down payment amount, multiply the home's purchase price by .035. For example, your down payment on a $200,000 home is $7,000.
Down Payment Assistance Programs
If you're having trouble raising the down payment you need, you may be able to get assistance through numerous homebuyer grants and programs. If you're a law enforcement officer, firefighter, emergency medical technician or teacher, you may qualify for the U.S. Housing and Urban Development's (HUD) Good Neighbor Next Door program. Veterans and active-duty military members may qualify for a zero down payment VA loan. And if you meet income requirements, and you'd love to live in a rural area, you may qualify for a U.S. Department of Agriculture (USDA) loan that requires no down payment.
K.C. Hernandez has covered real estate topics since 2009. She is a licensed real estate salesperson in San Diego since 2004. Her articles have appeared in community newspapers but her work is mostly online. Hernandez has a Bachelor of Arts in English from UCLA and works as the real estate expert for Demand Media Studios.