The best mortgage programs to help you buy a home with less than 20% down

Many loan programs allow for lower down payments than 20%. Understand your options to make the best choice.

By Jenny Rose Spaudo

Saving for a down payment can seem like a daunting task, especially for first-time homebuyers. Contrary to popular opinion though, you don’t actually have to pay 20% down. In this article, you’ll learn about the many down payment options and loan types available.

Key takeaways:

  • You don’t have to pay 20% down
  • Some mortgage loans allow for as little as 0% down
  • Consider applying for a down payment assistance program if you qualify
  • Weigh your financial situation before making a decision

What is a down payment?

A down payment is a percentage of the home’s purchase price that you as a buyer give to your lender. The lender then provides you with the remaining funds you need to purchase your new home in the form of a mortgage loan. For example, if you buy a home for $500,000 and pay a $100,000 (20%) down payment, your final loan will total $400,000.

Lenders require a down payment because it ultimately helps lower their risk. A down payment is also a sign of good faith, and shows that you’re serious about paying off the loan.

Do I need a 20% down payment?

No, you don’t need to pay 20% down, and many people these days choose not to. According to the National Association of Realtors, the average down payment in 2021 was 12% among all homebuyers and only 6% for those under 30.

Advantages of a 20% down payment

Even though you don’t have to pay 20% down, there are several good reasons to do so if you can. First of all, it reduces your loan amount, which decreases your monthly payments. A smaller loan also means you pay less in interest over the life of the loan.

Second of all, paying 20% down removes the need to pay private mortgage insurance (PMI), which can be anywhere from 0.25% to 2% of the loan amount.

Additional benefits include:

  • Lower mortgage interest rates
  • A lower loan-to-value ratio (LTV)
  • A higher chance of getting loan approval
  • A more competitive offer compared to other buyers
  • Higher equity in the home immediately after purchase

Disadvantages of a 20% down payment

Paying 20% down isn’t the right choice for everyone, though. Consider these drawbacks:

  • It can take a long time to save enough money
  • It can leave little money left for other expenses such as repairs, maintenance, or moving
  • If the value of the home goes down, you’ll end up losing more of your initial high investment
  • It can lower the rate of return on your investment

Don’t risk your financial health just to increase your down payment. For example, it’s not a good idea to rely on your emergency savings to pay 20% down. There are many alternatives to consider first.

How much is a down payment on a house?

How much of a down payment you have to pay depends on the loan type you choose. Some mortgage loan programs require down payments as high as 20%, while others allow you to put as little as 3% or even 0% down. Here are some of the most common types of mortgages and their requirements.

Conventional loans (usually 3-5%)

Conventional loans are by far the most popular type of mortgage in the U.S. As many as 80% of home loans in the country were conventional loans in August 2021.

Government-sponsored mortgage lenders like Fannie Mae and Freddie Mac require only 3-5% down for homebuyers with a healthy credit score of at least 620 to 660. Some individual lenders—such as banks and credit unions—only require 1-3% down.

Jumbo loans (10-20%)

Conventional loans can either be conforming or nonconforming. A conforming loan meets requirements and loan limits set by the Federal Housing Finance Agency (FHFA). The maximum loan amount depends on what type of property you’re buying.

Nonconforming loans, as the name implies, don’t meet those criteria. For example, jumbo loans exceed the regular loan amount limits. Because they present a higher risk to the lender, borrowers must pay around 10-20% down.

If your credit score is 700 or higher, you’ll be eligible for the best rates for jumbo loans (but a credit score of 660 is still acceptable).

FHA loans (3.5%)

With a credit score of at least 580, you can put as little as 3.5% down for loans sponsored by the Federal Housing Authority (FHA). If your credit score is between 500 and 579, plan to pay 10% down.

Have little to no credit history? Mortgage lenders who are approved to offer FHA loans may still consider your application as long as you meet certain requirements:

  • You paid rent on time for the last 12 months
  • You have only one 30-day late payment to creditors
  • No one has filed any collection actions against you in the last year, excluding medical debts

To qualify for an FHA loan, the property you’re buying has to comply with certain standards set by the U.S. Department of Housing and Urban Development.

One thing to consider is that FHA loans require you to pay a private mortgage insurance premium (PMI) at closing as well as monthly. Generally speaking, with a down payment of 10% or higher, you will pay PMI for 11 years. Anything less than 10% will require you to pay PMI throughout the life of the loan.

That’s why some people with an FHA loan choose to refinance with a conventional loan once they have built up 20% equity in their home. This gets rid of their PMI, and usually lowers the monthly mortgage payments. 

USDA loans (0%)

The U.S. Department of Agriculture offers a 0% down payment option for homebuyers with low to moderate income who are looking to buy a house in a rural area. (The USDA defines very low, low, and moderate income based on where you live.) Keep in mind that the house you’re buying must be in a town with a population of 10,000 or less.

The program also doesn’t impose any credit score requirements, although they expect you to demonstrate a willingness and the ability to manage your debts. To qualify for a USDA loan, your monthly housing payments shouldn’t exceed 29% of your gross monthly income, and your overall debt-to-income ratio shouldn’t surpass 41%.

There are pros and cons when it comes to USDA loan costs. The USDA’s interest rates tend to be lower, but closing costs tend to be higher. You’ll also have to pay a 2% mortgage insurance premium—not just when you close but throughout the life of the loan as well.

VA loans (0%)

Loans sponsored by the US Department of Veteran Affairs are reserved for active or retired military officers, their families, and their surviving spouses. With a VA loan, you’ll have lower closing costs, no mortgage insurance, and no broker’s fees.

VA loans don’t require a down payment, but they do demand a one-time funding fee of between 0.5-3.6%. You can either pay it as a down payment or roll it into your monthly mortgage payments. Those with a disability rating of 10% or higher, those who have a Purple Heart, or surviving military spouses are exempt from this fee.

Hand holding house keychain and banknotes
Not all mortgages are the same—different lending programs come with different down payment requirements for qualified buyers

Down payment assistance programs

If you don’t have enough money for a down payment and have a low to moderate income, you may be able to get the funds you need from a down payment assistance program.

In the U.S. alone, there are over 2,000 of these programs, which are typically sponsored by local or state governments or by a nonprofit. With a little research, you can find one within your state, county, or city.

There are several types of assistance these programs provide, depending on your financial situation.

Low-interest loans

Typically, you have to repay the down payment over a set period of time. Until you’ve fully repaid the loan, it acts as a second mortgage on top of your first one.

Deferred loans

With a deferred loan, you generally don’t have to repay the down payment and closing costs until you sell your home or refinance your mortgage. Different programs have different stipulations, though, so be sure to read the fine print before making a decision.

Forgivable loan

This type of loan is forgiven after a certain amount of time—usually five years. You must own and live in the home the entire time for the loan to be forgiven. If you sell the house, move, or refinance before that timeframe, you will need to repay the loan.

Grants

Grants are gifted money, so you never have to repay it. Some grant programs even cover both the down payment and the closing costs.

Requirements for down payment assistance programs

Many programs require you to be a first-time homebuyer, but there are plenty of exceptions. As many as 38% of programs are available to repeat buyers, according to Down Payment Resource.

Here are some other common requirements:

  • Your income must be below the program’s set limit
  • You must be buying a primary residence (not a rental property)
  • You must buy a home below the program’s price limit
  • Your mortgage lender must be approved by the program
  • You may need to take a first-time homebuyer class
a man and woman doing budgeting
There are benefits to paying 20% down on a house, but you don’t have to in order to get good rates depending on where you’re buying

How much do you really need to save for a down payment?

Before you decide how much of your savings to put toward your down payment, it’s important to look at your finances and understand how much money you need to buy a house.

Your housing expenses will be more than just the mortgage payments. You’ll also have to pay for:

  • Electricity
  • Water
  • Property Taxes
  • Home insurance
  • HOA (if applicable)
  • Home maintenance expenses

Consider these expenses when determining what you can afford. You may need to buy a less expensive home or save for a larger down payment to make your total housing expenses more manageable.

Use our mortgage calculator to see how much home you can afford or talk to your lender. If you don’t have a lender yet, ask your real estate agent for a referral.

Next, plan to save for more than just a down payment. You will also have to pay closing costs, which can be around 2-3% of the home’s value. It’s a good idea to save extra to accommodate for any unexpected expenses.

Wrapping it up

If you can afford to pay 20% down without putting your finances at risk, this can be a cheaper option in the long run. But if you can’t afford 20% down, there are many other loan options and down payment assistance programs that allow you to pay little to nothing down. Shop around and do your research before deciding how much money you’ll save for a down payment.

FAQ

What is a typical amount for a down payment on a house?

The average homebuyer in the U.S. pays 12% down, according to the National Association of Realtors. Buyers under 30 pay an average of 6% down. It’s possible, though, to buy a home with a down payment of as little as 3% with a conventional mortgage loan or even 0% down with a USDA loan, a VA loan, or a down payment assistance program.

Is it worth it to put 20% down on a house?

With a 20% down payment, your monthly mortgage payment is lower for two reasons: 1) The loan itself is smaller and 2) you don’t have to pay private mortgage insurance. That said, 20% down isn’t feasible for everyone, especially those who need to buy soon and have limited savings.

Does a higher down payment make your offer stronger?

Yes, a higher down payment tells the seller that your loan is more likely to go through. This gives your offer a competitive advantage over financed offers with a lower down payment. The most competitive offer, though, is an all-cash offer.

What are the disadvantages of a large down payment?

It’s difficult to save enough cash for a large down payment. The more money you put toward a down payment, the less you can put toward other necessary expenses, such as moving, repairs, and closing costs. Also, if your home goes down in value, it decreases your home equity and puts your original down payment at risk.

About the author: Jenny Rose Spaudo is a content strategist and copywriter specializing in real estate, finance, and investing. She’s written for clients like Edward Jones, Knock, and PropStream as well as for publications like Business Insider, GOBankingRates, and more. Visit her website and connect with her on LinkedIn.

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