Down Payment Dilemmas: Do You Really Need 20% to Buy a House?

It’s common for prospective homebuyers to start their search prepared to pay 20% of the purchase price up front. But with sale prices continuing to rise year over year (the national average in early 2024 was $420,800) a 20% down payment is often a major financial hurdle or downright impossibility.CitationCitation

The good news is that you can think of a 20% down payment as a goal — not a requirement. This is thanks to several types of mortgages available, including some with no down payment obligations. The caveat is that, typically, if your down payment is less than 20%, you will be required to pay for private mortgage insurance (PMI), an additional fee included in your monthly payments.

Keep in mind that home-buying is an individualized process. It’s important to explore all of your options, including the pros and cons of each, to find the financing solution that best fits your needs.

The following list includes some of the most common financing options for low or no down payments, intended to make homeownership more accessible and affordable for buyers of all backgrounds:

FHA Loans

FHA loans are insured by the Federal Housing Administration (FHA) and enable lenders to offer more forgiving qualification standards. Down payments can be as low as 3.5% on properties with one to four units. This financing option is popular with first-time homebuyers for its flexible credit score requirements and the option to use gifted funds for closing costs.

VA Loans

The U.S. Department of Veterans Affairs backs home loans for veterans, service members and eligible surviving spouses.Citation There are very few stipulations and no down payment requirements, as long as the sale price is at or below the appraised value of the home. The VA will finance loans for properties across the country with competitive terms and interest rates, no PMI and fewer closing costs.

USDA Loans

Homebuyers in eligible towns and rural areas can utilize U.S. Department of Agriculture loans with no down payment or PMI requirements, and often lower interest rates than conventional mortgage loans. Income restrictions apply. These loans include affordable mortgage insurance: A 1% up-front guarantee fee and a smaller monthly fee. Borrower credit profiles can be in the mid- to high 600s range.

Govt-sponsored Enterprises (GSE)

Frannie Mae and Freddie Mac are key players in the housing market, guaranteeing most U.S. mortgages or selling them on the secondary mortgage market. The federal government took control of the once-private companies following the 2008 financial crisis with the intent to provide liquidity, stability and affordability for homebuyers. A minimum down payment of 3% is required, as is a credit score of at least 620 for fixed mortgage rates. These GSEs typically require a debt-to-income ratio of 43% with few exceptions for certain borrowers. Borrowers must provide proof of a stable income and two to sixth months’ worth of cash reserves.

State and Local Government Programs

These programs often provide benefits like down payment assistance, lower interest rates and favorable loan terms. Examples include state housing finance agencies (HFAs), first-time homebuyer programs, nonprofit organizations and employer-assisted programs. The best way to find these opportunities is by working with a local mortgage broker who is familiar with your needs and geographic area.

The following chart shows minimum down payment requirements by loan type.

The Consumer Financial Protection Bureau defines PMI as a type of mortgage insurance used with conventional loans.CitationCitation Like other kinds of mortgage insurance, PMI protects the lender — not you — if you stop making payments on your loan. PMI is arranged by the lender and provided by private insurance companies. It can be paid monthly, up front or a combination of both.

PMI is calculated based on the terms of the mortgage (typically 10, 20 or 30 years), the borrower’s credit score and the amount of money paid up front.

Here’s an example of how PMI would be calculated for a $300,000 purchase with 5% down payment (loan amount of $285,000).

Assuming a 740 credit score, and a purchase on a primary residence single family home, the PMI factor would be 0.62%.

Calculation: $285,000 x 0.62% = $1,767 annual cost / 12 = $147.25 monthly premium

There are, however, ways to avoid PMI altogether or get rid of it over time.

From the get-go, you can:

• Pay 20% down or more

• Get approved for a VA loan

• Opt for a piggyback mortgage, essentially a second mortgage, or home equity loan, that is taken out by a borrower at the same time as their first mortgage.

• Choose lender-paid mortgage insurance (LPMI), which is just like regular PMI, only the lender pays for it on a borrower’s behalf. This comes with its own set of stipulations, such as an increase in your mortgage rate.

If at first you can’t avoid PMI, you may be able to eliminate it by:

• Showing a positive payment history by reducing the loan’s principal balance to 80% or lower of the home’s original appraised value, or to 80% of the home’s current market value. (20% home equity is your goal).

• Proving that the loan is current and up to date, which shows the lender that you are a responsible borrower with a solid payment history.

• Conducting an updated appraisal that shows the value of your home has increased, reducing the loan-to-value ratio.

While there are many benefits to a 20% down payment, like avoiding PMI and lowering monthly payments, it also comes with drawbacks like the need for substantial savings and potential opportunity costs.

Let’s say you’re purchasing a home for $300,000.

20% Down Payment

• Down Payment Amount: $60,000
• Loan Amount: $240,000
• Monthly Mortgage Payment: Approximately $1,150 (assuming a 30-year fixed-rate mortgage at 3.5% interest)
• PMI: Not required
• Total Monthly Payment: $1,150

3% Down Payment

• Down Payment Amount: $9,000
• Loan Amount: $291,000
• Monthly Mortgage Payment: Approximately $1,305 (assuming a 30-year fixed-rate mortgage at 3.5% interest)
• PMI: Approximately $120 per month (varies based on lender and credit score)
• Total Monthly Payment: $1,425

Key Differences

• 20% Down Payment: While the initial cost is higher, you benefit from lower monthly payments and no PMI, resulting in overall savings in the long term.
• 3% Down Payment: The lower initial cost keeps even more of your savings intact, but you will have higher monthly payments and expensive PMI, leading to greater long-term costs.

Determining how much your down payment should be depends on your financial situation, loan type and home buying goals. Take into account how much money you’ll have left for:

• Emergencies
• Home maintenance
• Moving costs
• Your existing financial responsibilities
• Projected expenses

The best way to make the right decision is to know your options. Our team of experienced mortgage professionals is constantly helping clients secure the conventional or low down payment loan they need. Contact us today to find out how we can help you.

Q: Do you have to put 20% down on a house?

A: Think of a 20% down payment as a goal instead of a requirement. There are several different types of mortgages available, including some with no down payment obligations. The caveat is that a down payment less than 20% requires the buyer to purchase private mortgage insurance, or PMI.

Q: What are the benefits of putting 20% down?

A: A buyer who puts 20% down will have a lower monthly mortgage payment, lower mortgage rates, better mortgage terms, avoid PMI and start with higher home equity.

Q: What are the downsides of a lower down payment?

A: The lowest initial cost keeps even more of your savings intact, but you will have the highest monthly payments and the most expensive PMI, leading to greater long-term costs.

Q: How do I decide on a down payment amount?

A: The best way to find an appropriate down payment amount based on your personal situation is by working with a trusted mortgage broker who is familiar with all of the options, from federally backed loans to local assistance programs.

Looking to get an idea of your ideal down payment? Our Home Down Payment Worksheet will help you examine your available funds, expected moving expenses and more.

Download the Worksheet