Is a 20% down payment necessary to buy a home? We answer this question often for clients who are anxious about coming up with tens of thousands of dollars — especially in rocky economic times. The truth is, even in a competitive real estate market, a 20% down payment isn’t imperative to secure a home.
In this blog post, we’ll debunk the common misconception, explore various down payment options and provide practical tips to help you achieve your homeownership goals without the stress.
Debunking The 20% Down Payment Myth
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.
Down Payment Assistance
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.
Minimum Down Payment Requirements
The following chart shows minimum down payment requirements by loan type.
| Conventional | 20% is standard, but down payments can be as low as 3% with PMI |
| FHA | 3.5% with a credit score of 580 or higher |
| Jumbo | At least 10%, but some lenders require as much as 30% |
| VA | No down payment requirement as long as the sale price is at or below the property’s appraised value |
| USDA | No requirement |
What You Need To Know About Private Mortgage Insurance (PMI)
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.