Down Payment: The 20% 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
For more information, chat with us at callhallfirst.com or give us a call at 866-Call-Hall.