One of the most persistent myths in real estate is that you need a 20% down payment to buy a home.
I hear some version of it all the time: “We’d love to buy, but we don’t have 20% saved yet.”
For a $400,000 home, 20% is $80,000. On a $500,000 home, it’s $100,000. Add closing costs, moving expenses and the money most buyers want to keep in savings after closing, and it’s easy to understand why someone might look at those numbers and decide homeownership is still years away.
But here’s the important part:
You do not necessarily need 20% down to buy a home.
In fact, many buyers purchase homes with considerably less. Depending on the type of mortgage you qualify for, your down payment could be 5%, 3.5%, 3% or even 0%.
That doesn’t mean putting less than 20% down is always the best financial decision. There are tradeoffs to consider, including mortgage insurance, monthly payments and the amount of equity you’ll have in the home when you purchase it.
But the idea that you must save 20% before you can even consider buying a home is outdated. And unfortunately, that misconception may keep perfectly qualified buyers on the sidelines longer than necessary.
Let’s look at some of the most common mortgage options available to buyers.
Why Does Everyone Talk About 20% Down?
There is a reason the 20% figure comes up so often.
With many conventional mortgages, putting at least 20% down allows you to avoid private mortgage insurance, commonly called PMI.
PMI is insurance that protects the lender if a borrower defaults on the mortgage. Although the borrower pays for it, the insurance protects the lender, not the homeowner.
Because PMI adds to your monthly housing expense, avoiding it can certainly be beneficial. A larger down payment can also reduce the amount you need to borrow, which generally means a lower monthly principal and interest payment.
Those are good reasons to consider putting 20% down if you have the money and it makes sense for your financial situation.
But “20% down has benefits” is very different from “20% down is required.”
For many buyers, it simply isn’t.
VA Loans: Eligible Buyers May Be Able to Purchase With 0% Down
If you are an eligible veteran, active-duty service member or qualifying surviving spouse, a VA loan can be one of the most attractive mortgage options available.
VA loans are backed by the U.S. Department of Veterans Affairs and, for qualified borrowers, frequently allow a home purchase with no down payment at all.
Yes, 0%.
That can make an enormous difference for a buyer who has good income and credit but doesn’t have tens of thousands of dollars available for a down payment.
Another significant advantage of a VA loan is that it generally does not require monthly private mortgage insurance.
That combination of no required down payment for many borrowers and no monthly PMI is one reason eligible buyers should absolutely explore VA financing before assuming they need a conventional mortgage.
There are some costs and requirements to understand. VA loans generally include a VA funding fee, although certain eligible borrowers are exempt. The amount of the funding fee can vary depending on factors such as the borrower’s circumstances and whether a down payment is made.
VA financing also has specific property and appraisal requirements, so it is important to work with a lender and real estate agent who understand the VA process.
Still, if you’re eligible for a VA loan, don’t dismiss buying a home simply because you don’t have 20% saved. Your VA benefit may give you options that look very different from the traditional down-payment scenario.
FHA Loans: As Little as 3.5% Down for Many Buyers
Another option many buyers should know about is an FHA loan.
FHA loans are mortgages insured by the Federal Housing Administration. They were designed to make homeownership more accessible, particularly for buyers who may not qualify as easily under conventional lending guidelines.
One of their biggest advantages is the down payment.
Qualified borrowers may be able to purchase a home with as little as 3.5% down.
Consider what that means on a $400,000 home:
A 20% down payment would be $80,000.
A 3.5% down payment would be $14,000.
That’s a difference of $66,000.
Of course, the down payment isn’t the only money needed to purchase a home. Buyers also need to plan for closing costs and other expenses associated with the purchase. But the difference illustrates why understanding your financing options is so important.
FHA loans can also offer more flexible qualification guidelines than some conventional loans, which may make them appealing to buyers with less-than-perfect credit or buyers who don’t have a large amount of cash available.
What’s the Tradeoff With an FHA Loan?
The biggest thing buyers should understand is mortgage insurance.
FHA loans generally require mortgage insurance premiums, often referred to as MIP.
There are typically two components: an upfront mortgage insurance premium and an annual mortgage insurance premium that is generally paid as part of the monthly mortgage payment.
Depending on the loan terms and down payment, FHA mortgage insurance may remain for a significant portion of the loan or even for the life of the loan unless the borrower later refinances into another mortgage.
That doesn’t automatically make an FHA loan a bad choice.
Think of mortgage insurance as one piece of the overall cost of financing. For some buyers, paying mortgage insurance in exchange for purchasing a home sooner with a smaller down payment may make sense. For others, waiting and putting more money down could be the better decision.
The point is to compare the options rather than assuming you’re automatically disqualified because you don’t have 20%.
Conventional Loans: You May Need Much Less Than You Think
This one surprises a lot of buyers.
When people hear “conventional mortgage,” they often assume that means 20% down.
It doesn’t.
Depending on the loan program and the borrower’s qualifications, conventional mortgages may be available with down payments of 3% or 5%.
Some 3% down conventional programs are specifically designed for first-time home buyers or borrowers who meet certain eligibility requirements.
And “first-time home buyer” doesn’t always mean someone who has never owned a home in their life. Some mortgage programs consider you a first-time buyer if you haven’t owned a primary residence during a specified period of time.
That’s why it’s worth talking with a knowledgeable lender rather than ruling yourself out based on assumptions.
What About PMI?
If you use a conventional mortgage and put less than 20% down, you will typically have to pay private mortgage insurance.
The cost of PMI varies based on factors including your credit profile, down payment and loan characteristics.
There is also an important difference between conventional PMI and FHA mortgage insurance.
With a conventional loan, PMI can generally be removed once certain requirements are met and you have sufficient equity in the home. Federal rules also provide for automatic termination of PMI in many circumstances once the mortgage reaches a specified loan-to-value level, assuming the borrower is current on the loan.
In plain English: PMI doesn’t necessarily stay on your mortgage forever.
That makes a low-down-payment conventional loan worth considering for buyers who qualify.
What Does a Smaller Down Payment Actually Look Like?
Sometimes percentages don’t feel meaningful until you see the numbers.
Imagine you’re purchasing a $500,000 home.
A 20% down payment would be:
$100,000
A 10% down payment would be:
$50,000
A 5% down payment would be:
$25,000
A 3.5% down payment would be:
$17,500
A 3% down payment would be:
$15,000
And an eligible VA borrower may potentially qualify for:
$0 down
Those are dramatically different amounts of money.
Again, this doesn’t mean the lowest possible down payment is automatically the best choice. Your monthly payment, mortgage insurance, interest rate, cash reserves and long-term plans all matter.
But imagine believing you need $100,000 before you can buy a $500,000 home when you may actually qualify for financing requiring a fraction of that amount.
That’s exactly why I encourage prospective buyers to talk with a lender before deciding they’re not ready to buy.
Is It Better to Put 20% Down If You Can?
Sometimes.
If you have sufficient savings, putting 20% down can have some real advantages. You may be able to avoid PMI on a conventional loan, reduce the amount you’re borrowing and lower your monthly mortgage payment.
But there is another question worth asking:
What will your finances look like after you make that down payment?
I generally don’t like the idea of buyers draining every dollar of their savings just to reach an arbitrary 20% threshold.
Homes have expenses.
After closing, you may need money for repairs, furniture, moving expenses, appliances, landscaping or any number of unexpected costs. Having cash reserves can provide valuable breathing room.
Some buyers may decide they would rather put 10% down and keep more money in savings. Others may choose 20% because eliminating PMI and reducing their monthly payment is more important to them.
Neither decision is universally right or wrong.
The better question is: What makes the most sense for your financial situation?
Don’t Forget About Closing Costs
There is one more misconception worth clearing up.
Your down payment isn’t the only cash you may need at closing.
Buyers can also have closing costs associated with obtaining the mortgage and completing the purchase. These can include lender fees, appraisal costs, title-related expenses, prepaid taxes, homeowners insurance and other charges.
The amount varies considerably from transaction to transaction.
In some situations, buyers may also be able to negotiate for the seller to contribute toward certain allowable closing costs, depending on the loan program, contract terms and market conditions.
This is another reason I recommend looking at the total cash needed to close, rather than focusing only on the down-payment percentage.
A good lender should be able to give you estimates showing both your anticipated monthly payment and approximately how much money you would need to bring to closing under several different scenarios.
Your Down Payment Is Only One Part of the Mortgage Equation
When I’m talking with buyers, particularly first-time buyers, I encourage them not to become overly focused on one number.
A lender looks at much more than your down payment.
Your income, employment, debts, credit history, available assets and the type and price of the property can all affect your financing options.
And different loan programs have different guidelines.
You might discover that an FHA loan gives you the best path to purchasing today. You might qualify for a 3% or 5% down conventional mortgage. If you’re eligible for VA financing, that may be the obvious place to start.
Or you may talk with a lender and decide that waiting six months and saving additional money is the smartest choice.
All of those can be good outcomes.
What I don’t want buyers to do is wait several years because someone once told them, “You have to put 20% down.”
Before You Decide You Can’t Buy, Find Out What’s Actually Possible
If buying a home is something you’re considering, you don’t need to have everything figured out before talking to a real estate agent or lender.
And you certainly don’t need to walk into the conversation with 20% sitting in your bank account.
Start by finding out what you qualify for.
Ask a reputable mortgage lender to compare several scenarios for you. What would your payment look like with 3% down? What about 5%, 10% or 20%? Would you qualify for FHA financing? Are you eligible for a VA loan? How much would mortgage insurance cost? How much cash would you need at closing?
Then you can make the decision based on your actual numbers, rather than an old rule of thumb.
I’ve worked with home buyers in Dallas for many years, and one thing I’ve learned is that buyers often have more options than they realize. The financing side of a home purchase can sound intimidating from the outside, but a good lender can break the numbers down in a way that makes them much easier to understand.
The 20% down payment isn’t a requirement for many home buyers.
It’s simply one option.
And if the belief that you need 20% has been the one thing keeping you from exploring homeownership, it may be time to have a conversation with a lender and find out what’s actually possible for you.