Paid for by Rocket Mortgage

Say “down payment” to a househunter and you’re likely to get a deer-in-headlights look. After all, a down payment is a big deal for even the most financially prepared potential buyer. It’s a significant amount of money to have set aside — and it can be tough to navigate the “right” amount of down payment to offer and still have plenty of room for any unexpected expenses, not to mention furniture. In a competitive market, a down payment can also feel like a make-or-break when it comes to getting an offer accepted.

While it’s true that a down payment is one factor considered by sellers in reviewing offers, it’s not the only factor in whether or not your bid on a house is accepted. It’s important that you feel comfortable with the down payment, and feel confident that whatever amount you put down fits within your overall financial picture. Here, factors to decide when determining a down payment.

Assess how much down payment you can comfortably afford

You may have heard you need to prepare to put down at least 20% on a house. While 20% is typically a good benchmark that keeps you from having to purchase private mortgage insurance (PMI), a low-interest rate environment may mean that PMI rates may add several hundred dollars per month to your overall loan. Using a mortgage calculator can help you run numbers. In general, the more down payment you can afford (even if it’s not 20%) the lower your PMI may be. And when you have 20% or more equity in your home, your PMI can be cancelled.

“In general, it’s good to have some runway to plan for a down payment,” says Eric Roberge, CFP, founder of Beyond Your Hammock, a financial planning firm, where he works frequently with professionals dealing with life transitions, including buying a house. “You don’t want your down payment to decimate your savings.”

Roberge adds that in addition to your down payment, it’s a good idea to have 3-to-6 months of your salary in savings that can comfortably cushion for closing costs and any repairs, and could be tapped to pay the mortgage in the event of a job loss or income change.

A calculator, like the “What Home Price Can You Afford” calculator from Rocket Mortgage, can help you roughly estimate how much cash on hand you may need to purchase a home. It may require some back and forth with budgeting to shift your down payment so you’re comfortable with that number alongside your savings, adds Roberge.

Know the pros and cons of tapping into other resources for down payment

Some buyers have savings to cover a down payment. But others may be considering other ways to raise the funds.

“Some homeowners tap into their retirement savings to fund a down payment,” notes Leslie Tayne, a financial attorney and founder of Tayne Law Group, P.C., who doesn’t recommend this strategy. Not only will you have to pay income tax on cash withdrawn, “you cheat your future self by reducing the amount of money that grows and compounds each year for your retirement.” Tayne adds that needing to tap into retirement savings may also be an indicator that you’re entering a financial obligation that may be a stretch to afford.

Other homebuyers may tap into gifts from family members to cover a down payment. If this is the case for you, you’ll likely need a gift letter for your lender. This is a document signed by you and the gift givers that the money is a gift and not a loan. It may be a good idea to get this gift letter prior to your mortgage application, so you don’t need to scramble for documents as your mortgage application is being reviewed. It’s also good to make sure that you feel comfortable accepting the gift, and it doesn’t come with any strings — explicit or unspoken — attached.

You also may consider whether you qualify for programs that offer a mortgage with a low down payment, such as FHA, VA, or USDA.

What if you don’t have enough for a down payment?

A competitive market can make potential buyers want to stretch their budget. But experts say waiting a year to get your finances in order can be beneficial. “There are so many factors in buying a house, and you don’t want to get so fixated on one thing, like a low interest rate, that you forget about your financial well-being,” says Roberge.

Committing to a plan to save up for a down payment can be a valuable way to get in the best financial shape possible before you buy a house. One tactic if you’re buying a house with a partner: Live on one person’s income for a year, trimming your budget accordingly. But small budgeting steps can add up. Because a house is such a significant purchase — potentially the largest of your life — taking your time, doing research and examining multiple scenarios can help you find the right home for your financial situation.

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From Rocket Mortgage:

For more than 35 years, Rocket Mortgage has been simplifying the home loan process by designing it entirely around you. When you want personalized attention and need a mortgage to fit your family and budget, Rocket Can. Visit RocketMortgage.com to learn more. Rocket Mortgage, LLC; NMLS #3030; www.NMLSConsumerAccess.org. Equal Housing Lender. Licensed in 50 states. For additional information, please visit RocketMortgage.com.