Money·4 min read

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

money rule to break mortgage down payment
Design: theSkimm | Photo: iStock
Apr 1, 2022

If you’re looking to buy a home, you may have heard that you should have 20% of the price for a down payment. Experts have long recommended this as a rule of thumb to give hopeful buyers a ballpark figure to aim for. 

But as home prices continue to rise, a 20% down payment is getting further out of reach for some. That doesn't mean homeownership is a distant dream. The National Association of REALTORS® reported that the typical down payment among first-time homebuyers was just 7% in 2021. 

So yes, you can buy a home with less than 20% down.

Great news. But why is a 20% down payment standard?

To help keep mortgage costs down. If you put down less, lenders generally require you to pay for private mortgage insurance (PMI). Because a mortgage is a contract that tells the bank you promise to make payments on the loan. Your down payment is how you can show you really mean it. 

So if you have a smaller down payment, the lender wants extra assurance that you can, in fact, afford the mortgage. That could add as little as 0.15% — or as much as 2.5% or more — of the loan per year for PMI to your total costs.

So why would I put down less than 20%?

Simply put, sometimes it’s monetarily necessary for homebuyers to go with a smaller down payment. Especially in today’s market where renting might not be the cheaper option. Buying a home and getting started building equity — even if it’s slow-going for a while — might fit better into some folk’s long-term financial plans.

Pros of a Smaller Down Payment

A few advantages to smaller down payments:

  • It saves you cash for other up-front costs related to mortgage and moving.

  • PMI payments aren’t forever.

Cons of a Smaller Down Payment

But there are downsides to paying less upfront, including:

  • Larger monthly mortgage payments

  • Possibly higher interest rates

  • Longer time to build equity

How can I put less than 20% down?

Conventional mortgages generally require a credit score of at least 620 when putting down less than 20%. Many require a minimum down payment of 3%. The gov also backs mortgages like FHA loans, VA loans (for those who’ve served in the military), and USDA loans (for rural homebuyers). FHA loans have a lower credit score requirement of 580 for borrowers who put at least 3.5% down. Eligible buyers can get USDA and VA loans with $0 down.

Bottom line: You have options. And you should compare loan terms at multiple lenders to find the best interest rate available to you. 

How do I decide what size down payment is right for me?

The right size down payment is the one that makes sense for your goals and budget. Generally speaking, the bigger the down payment you can manage, the better. Not only will you save on your mortgage in the long term, but it could also help you win a bidding war (which is still pretty common in the tight housing market). 

Oh, and don’t forget to look into down payment assistance programs — a common money mistake first-time homebuyers make. Many local and state governments, plus the federal gov, offer credits and other help for first-time homebuyers.

theSkimm

A 20% down payment isn’t always necessary to buy a home. A larger down payment comes with a lot of benefits, but less money down may be a faster track to homeownership.


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