Down Payment: The 20% Myth?

Down Payment 20 Percent Myth

Summary: A down payment is money paid up front during a closing to secure the loan. The down payment requirement of 20% is a myth in today’s housing market. Loan types have adjusted their down payment requirements to expand homeownership—some offering down payments as low as 3%. A lower down payment may hold numerous benefits for buyers.

A down payment is money paid by the borrower during closing to secure the loan. Traditionally a 20% down payment on a home was once recommended for the following reasons:

  • More equity within the home
  • Avoiding private mortgage insurance (PMI)
  • Receiving lower interest rates and lower costs

However, many loan options allow borrowers to apply for a mortgage with a down payment of less than 20%.

Although 20% or more is still a solid option, loan types have adjusted their down payment requirements to expand potential homeownership. Lower down payment requirements allow borrowers of diverse situations to become homeowners. There are also first-time home buyer programs that offer additional down payment assistance.
Below are the minimum down payment requirements for common home loan types:

  • FHA loans – 3.5%
  • VA loans – no down payment requirement
  • USDA loans – no down payment required
  • Conventional loans – 3%

As down payment requirements adjust with the expanding housing market, there are numerous benefits to a low down payment. Instead of allocating their entire budget towards a down payment, borrowers can:

  • Create an emergency fund
  • Create an investment account
  • Pay down other high interest debts
  • Utilize the difference for a home improvement project

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