One of the biggest misconceptions among first-time homebuyers is that you need a huge amount of cash before you can even think about buying a home.
You may have heard:
“You need 20% down.”
That is not necessarily true.
Depending on the type of home you are buying, the loan program, your credit, your income, and the lender, the amount of money you need can vary dramatically.
For some buyers, the down payment may be relatively small.
For others, the real challenge is not the down payment at all—it is the combination of the down payment, closing costs, prepaid expenses, and the cash they want to keep available after closing.
So instead of asking:
“How much do I need for a down payment?”
A better question is:
“How much total cash will I need to comfortably complete the purchase?”
The Down Payment Is Only One Part of the Equation
Suppose you are buying a $500,000 home.
If you are using a loan program requiring a 5% down payment, the down payment would be:
$25,000
But that does not necessarily mean $25,000 is all you need.
There may also be:
- Closing costs
- Property taxes
- Homeowners insurance
- Prepaid interest
- Inspection costs
- Appraisal costs
- HOA-related charges
- Moving expenses
- Money for immediate repairs or improvements
This is why I prefer to talk about cash needed to close rather than focusing only on the down payment.
Do You Really Need 20% Down?
No.
A 20% down payment can have advantages, particularly with conventional financing. For example, putting at least 20% down may eliminate the need for private mortgage insurance in many conventional transactions.
But 20% is not a universal requirement.
Depending on the program, qualified buyers may have access to considerably lower down-payment options.
VA-backed purchase loans, for example, can allow eligible borrowers to purchase without a down payment in many situations, provided the property value and other loan requirements are met.
The important point is that you should not delay exploring homeownership simply because you have not saved 20%.
Find out what options actually apply to you first.
A Bigger Down Payment Is Not Always Better
Imagine you have $50,000 saved.
You could potentially put almost all of it toward your home purchase.
But should you?
Not necessarily.
Owning a home comes with unexpected expenses.
Shortly after moving in, you might discover that you need:
- A new water heater
- Plumbing work
- An appliance
- Roof repairs
- Landscaping
- Furniture
- Electrical work
- Heating or air-conditioning repairs
Using every available dollar for the down payment can leave you in a difficult position after closing.
Sometimes a smaller down payment combined with a healthy emergency reserve is the better financial decision.
Your goal is not simply to get through closing.
Your goal is to be comfortable after closing too.
Closing Costs Are Separate From Your Down Payment
This is another area that surprises first-time buyers.
Your closing costs are generally separate from your down payment.
They can include expenses associated with originating and completing the transaction, such as:
- Lender charges
- Appraisal
- Credit-related fees
- Escrow or settlement charges
- Title-related costs
- Recording fees
- Other transaction expenses
The exact costs vary considerably depending on the loan, property, location, and transaction.
This is why percentages quoted online can be useful for rough planning but should not be treated as your actual number.
Once you have a specific loan scenario, your lender can give you a much better estimate.
Don’t Forget About Prepaid Expenses
There is another category of money that buyers sometimes call “closing costs,” even though technically some of these expenses are prepaids rather than loan costs.
These can include:
- Homeowners insurance
- Property taxes
- Initial escrow-account deposits
- Prepaid mortgage interest
If your loan uses an impound or escrow account for property taxes and insurance, you may need to fund that account at closing.
The amount can depend heavily on the time of year you purchase and when taxes or insurance payments are due.
So two people buying similarly priced homes can have different amounts of cash needed at closing.
What About Your Earnest-Money Deposit?
When your offer is accepted, you may make an earnest-money deposit.
That money is generally not an additional cost on top of everything else.
Instead, it is typically credited toward the funds you ultimately need at closing.
For example, suppose your final required cash to close is $30,000 and you previously deposited $5,000 into escrow as earnest money.
Generally speaking, that $5,000 is credited toward the transaction rather than disappearing.
Your final amount needed would reflect the money you have already deposited.
Seller Credits Can Make a Big Difference
One strategy first-time buyers sometimes overlook is negotiating for the seller to pay allowable closing costs.
Depending on the loan program and transaction, a seller may be permitted to contribute toward certain buyer expenses.
This can be particularly valuable for a buyer who has enough income to comfortably afford the monthly payment but does not have a large amount of additional cash available for closing.
Consider two negotiations:
Option A: The seller reduces the purchase price by $5,000.
Option B: The seller contributes $5,000 toward allowable buyer closing costs.
Depending on the transaction, Option B might save the buyer considerably more cash upfront.
That does not mean seller credits are always better than a price reduction.
But they are worth discussing with your real estate agent and lender before deciding how to structure an offer.
A Special Note for Mobile and Manufactured Home Buyers
This is another area where buyers need to understand that not all home financing works the same way.
Manufactured and mobile homes may be financed in different ways depending on whether the home is considered real property or personal property.
If the home is permanently attached to land that you own and is being financed as real estate, traditional mortgage programs may be available.
But many manufactured and mobile homes located in parks on leased land are financed as personal property, commonly referred to as a chattel loan.
Chattel financing has its own underwriting and down-payment requirements.
Some Mobile-Home Chattel Loans Can Start at 5% Down
With some chattel lenders, qualified buyers may be able to finance an eligible manufactured home with as little as 5% down.
One important dividing line is the age of the home.
The federal HUD manufactured-home construction standards became effective on June 15, 1976, and HUD-certified manufactured homes built after that date are subject to those federal construction and safety standards. HUD-certified homes normally have a certification label, commonly called a HUD tag.
For certain chattel-loan programs available for homes built June 15, 1976 or later, down payments can be as low as approximately 5% for qualified borrowers.
That does not mean every post-1976 mobile home automatically qualifies for 5% down.
The lender may also consider:
- Credit score and credit history
- Income
- Debt
- Age and condition of the home
- Location of the home
- Mobile-home park requirements
- Loan amount
- Occupancy
- Other underwriting factors
But it is important for buyers to know that mobile-home financing does not always require the very large down payments people sometimes assume.
Why June 15, 1976 Matters
You may hear people refer to a manufactured home as pre-HUD or HUD-code.
June 15, 1976 is the key date.
HUD states that manufactured homes produced after June 15, 1976 must comply with the federal Manufactured Home Construction and Safety Standards and contain certification for each transportable section.
Homes built before that date are commonly called pre-HUD mobile homes.
Financing for pre-HUD homes can be much more limited.
However, limited does not necessarily mean impossible.
Some specialized lenders may finance older mobile homes, but the loan terms, down-payment requirements, credit requirements, and property standards may be different.
This is another reason working with someone familiar with manufactured-home financing can matter.
Buying a Mobile Home on Leased Land Changes the Math
Suppose you purchase a mobile home in a California park for $200,000.
At a hypothetical 5% down payment, the down payment would be:
$10,000
That can make the initial hurdle significantly lower than many buyers expect.
But the monthly budget needs to include more than the home-loan payment.
You may also have:
- Space rent
- Park fees
- Homeowners insurance
- Property taxes or registration-related expenses
- Utilities
A lower purchase price and down payment can make manufactured housing attractive, but you still want to compare the complete monthly cost.
Down Payment and Cash to Close Are Different Numbers
This distinction is worth repeating.
Suppose your required down payment is $15,000.
Your total amount needed at closing might be:
Down payment: $15,000
Closing costs and prepaids: $8,000
Total estimated cash needed: $23,000
Then imagine that you already made a $3,000 earnest-money deposit and negotiated a $4,000 seller credit.
The remaining cash you need could be considerably different.
This is why asking only:
“What’s the minimum down payment?”
doesn’t give you enough information.
You want an estimate of the entire transaction.
What About Down-Payment Assistance?
Some California first-time buyers may also qualify for down-payment or closing-cost assistance.
Programs change, and eligibility can depend on factors such as:
- Income
- Purchase price
- Location
- Loan program
- First-time-buyer status
- Property type
- Occupancy
Some assistance programs may help with the down payment, closing costs, or both.
But assistance programs should be evaluated carefully.
Ask:
- Does the assistance have to be repaid?
- Is there a second loan?
- Is interest charged?
- When does repayment become due?
- Does it affect the first-mortgage rate or cost?
- Does it limit which properties you can buy?
“Down-payment assistance” does not always mean free money.
Make sure you understand the complete financing structure.
Gift Funds May Also Help
First-time buyers frequently receive down-payment assistance from family members.
Depending on your loan program, gift funds from an eligible donor may be allowed.
However, traditional mortgage programs often have rules regarding:
- Who may provide the gift
- How the gift is documented
- How the money is transferred
- Whether repayment is expected
Do not have someone deposit a large amount into your bank account and assume you can explain it later.
Ask your lender how to handle the gift before the money moves.
As discussed in my article about large deposits, traditional mortgage lenders may need to verify the source of certain funds, while some chattel lenders do not impose the same source-of-funds requirements.
Don’t Forget Your Emergency Fund
Here is a number that technically isn’t part of your closing statement but absolutely belongs in your planning:
What will you have left after you buy the home?
Suppose you need $32,000 to close and you have exactly $32,500.
Could the transaction work?
Possibly.
Would I want you to be left with $500 after buying your first home?
Probably not.
The amount of reserves that makes sense varies from person to person, but think about:
- Your job stability
- Monthly expenses
- Condition of the property
- Dependents
- Vehicles
- Medical expenses
- Upcoming major purchases
- Your comfort level with emergencies
Your lender’s minimum requirements and your personal minimum savings should not necessarily be the same number.
Don’t Buy Furniture Before You Close
This deserves its own warning.
You find your new home.
You’re excited.
So you finance:
- A new sofa
- Bedroom furniture
- Refrigerator
- Washer and dryer
- Television
Now you have several thousand dollars of new debt before your mortgage closes.
That new debt can potentially affect your loan qualification.
Even paying cash for major purchases can reduce funds the lender expected you to have available.
The safer rule is:
Wait until your home purchase is closed before making major financial purchases unless you’ve discussed them with your lender first.
How Much Should You Save Before You Start Looking?
There is no single correct answer.
Instead, find out what your actual numbers look like.
Before you seriously shop for a home, you should have an estimate of:
- Your comfortable purchase price.
- Your likely down payment.
- Your estimated closing costs.
- Your estimated prepaid expenses.
- Any available seller credits or assistance.
- How much money you want left after closing.
Then you have a real savings target.
Maybe you discover that you need $40,000.
Maybe you need $20,000.
Maybe a particular manufactured-home financing option means you need considerably less.
The important thing is that you are working from real numbers instead of assuming you need 20% down because someone told you that years ago.
You May Need Less Money Than You Think
California home prices can make buying seem impossible.
And for some buyers, more saving really will be necessary.
But don’t rule yourself out based only on the size of your savings account.
The type of home you choose can make an enormous difference.
So can:
- The loan program
- Down-payment percentage
- Seller credits
- Gift funds
- Assistance programs
- Property type
- Manufactured-home financing
- Your credit and financial profile
The first step isn’t necessarily saving another $50,000.
The first step may simply be finding out what you would actually need.
Want to Find Out What Your Numbers Look Like?
I create straightforward videos for California homebuyers covering first-time homebuyer financing, down payments, qualification, credit, manufactured and mobile homes, and the things you should understand before making an offer.
Watch My California Homebuyer Videos
If you’re thinking about buying and would like to know approximately how much cash you may need, you can also contact me.
We can look at the type of property you’re considering, your possible price range, available funds, and financing options so you have a realistic target before you start shopping.
Continue Reading
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Why Lenders Ask About Large Deposits Before You Buy a Home
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How Much Home Can You Realistically Afford in California?
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This article provides general educational information and is not a commitment to lend. Down-payment requirements, loan programs, closing costs, rates, fees, asset requirements, and availability vary by borrower, lender, property, and loan program. Certain personal-property/chattel loan programs may offer down payments as low as 5% for qualified borrowers and eligible homes, but 5% financing is not available for every borrower or property.