For decades, there’s been a “magic number” in real estate that has caused more stress for aspiring homeowners than almost any other: 20%.
The idea of saving up 20% of a home’s purchase price can feel daunting, if not impossible, in today’s market. It’s a figure that makes many people feel that homeownership is permanently out of reach.
Well, we’re here to tell you some good news: The 20% down payment is one of the biggest myths in real estate.
While putting 20% down has its benefits, it is absolutely not a requirement to buy a home. Millions of people have purchased homes with significantly less. Let’s bust this myth once and for all and explore what your real options are in 2025.
The Origin of the 20% “Rule”
So, where did this number even come from? The 20% figure is tied to something called Private Mortgage Insurance (PMI). On a conventional loan, lenders see a down payment of less than 20% as a higher risk. To protect themselves against that risk, they require the borrower to pay for PMI.
Therefore, putting 20% down became known as the way to avoid PMI. Over time, this smart financial strategy was misinterpreted as a mandatory requirement to qualify for a loan. It’s not.
Your Low-Down-Payment Mortgage Options
The truth is, there are several popular and accessible loan programs specifically designed to help people buy a home with a smaller down payment. Here are the most common ones:
Conventional Loans: As Low as 3% Down
Many people are surprised to learn that you don’t need to get a government-backed loan to make a small down payment. If you have a good credit score (typically 620 or higher), you may qualify for a conventional loan with as little as 3% down.
- Who it’s for: Buyers with strong credit who may not have substantial savings.
- The Big Benefit: Unlike some other loan types, the PMI on a conventional loan can be canceled once you reach 20% equity in your home.
FHA Loans: As Low as 3.5% Down
Backed by the Federal Housing Administration, FHA loans are a fantastic option for first-time homebuyers or those with less-than-perfect credit.
- Who it’s for: Buyers who need more lenient credit score requirements (as low as 580 in some cases).
- The Big Benefit: The low 3.5% down payment makes homeownership much more accessible.
- The Trade-Off: You will pay a Mortgage Insurance Premium (MIP), and for most borrowers, this insurance lasts for the entire life of the loan.
VA Loans: 0% Down Payment
For eligible veterans, active-duty service members, and surviving spouses, the VA loan is one of the best mortgage products on the market.
- Who it’s for: Our nation’s service members.
- The Big Benefit: No down payment is required at all. You can finance 100% of the home’s purchase price. Plus, there is no monthly mortgage insurance.
- The Fine Print: While there’s no monthly PMI, there is a one-time VA Funding Fee, which most borrowers choose to roll into their total loan amount.
USDA Loans: 0% Down Payment
The U.S. Department of Agriculture offers this program to encourage homeownership in less densely populated areas.
- Who it’s for: Buyers with modest incomes purchasing a home in an eligible rural or suburban area. You can check a property’s eligibility on the USDA website.
- The Big Benefit: Another incredible 0% down payment option.
The Pros and Cons of a Smaller Down Payment
Opting for a lower down payment is a great strategy, but it’s important to see the full picture.
Pros:
- Buy a Home Sooner: You can enter the market years earlier than if you waited to save up 20%.
- Keep Your Savings: Holding onto more cash gives you a financial cushion for emergencies, moving costs, repairs, and furniture.
Cons:
- Higher Monthly Payment: Your loan amount will be larger, and you’ll have the added cost of mortgage insurance (PMI or MIP).
- Pay More Interest Over Time: A larger loan principal means you’ll pay more in total interest over the life of the loan.
- Less Initial Equity: You’ll start with a smaller ownership stake in your home.
So, How Much Should You Actually Put Down?
The right down payment isn’t a magic number—it’s a personal financial decision. Instead of focusing on the 20% myth, ask yourself these questions:
- What monthly payment can I comfortably afford?
- How much cash do I want to keep in savings after closing?
- How does the cost of mortgage insurance fit into my budget?
The perfect down payment is the one that gets you into your home without leaving you financially strained.
Frequently Asked Questions (FAQs)
Q: Can I use gift money for my down payment? A: Yes! Most loan programs allow you to use money gifted from a family member for your down payment. You’ll just need a “gift letter” from the donor stating the money is not a loan.
Q: What is PMI and how much does it cost? A: PMI (Private Mortgage Insurance) protects the lender if you default on your loan. The cost varies but typically ranges from 0.5% to 1.5% of the original loan amount per year, paid in monthly installments.
Q: Does a smaller down payment mean a higher interest rate? A: Not always, but it can. Lenders view a smaller down payment as a higher risk, which can sometimes result in a slightly higher interest rate. However, your credit score has a much larger impact on your rate.
Don’t Let a Myth Delay Your Dream
The 20% down payment is the ghost story of the mortgage world—widely told, but rarely true. With loan options available for 3.5%, 3%, or even 0% down, the path to homeownership is more accessible than you think.
Ready to find out what your down payment options really look like? A home loan advisor can walk you through the numbers and help you find a strategy that fits your life.
