Do You Need 20% Down to Buy a House? Why This Old Rule No Longer Applies

If you’ve ever found yourself interested in buying a home, you’ve likely heard that providing your lender with a 20% down payment is your best option when applying for a mortgage loan. This rule, however, no longer applies now that home prices have risen considerably. The following details why your down payment can be lower than the 20% rule.

A 20% Down Payment Isn’t Necessary to Buy a Home

In the 2017 Aspiring Home Buyers Profile that the National Association of Realtors put out, it was found that nearly 40% of people who didn’t own a home believed that a down payment of 20% or higher was necessary when purchasing a home.

Another 26% of non-owners believed that the down payment should be 15-20%. A further 22% stated that a down payment of 10-14% was required to purchase a home. The truth is that the down payment you pay doesn’t need to be any of these numbers. While lending requirements are relatively strict, the down payment can be as low as 3-5% for some lenders.

In 2021, first-time buyers made an average down payment of 7% when buying a home. For repeat buyers, this number was 17%, which is largely the result of repeat buyers using some of the funds from the sale of their existing home to purchase their new one.

The reason that first-time buyers pay a relatively low down payment on average is because of how difficult it can be to come up with enough funds to cover the down payment without having equity in a home. Both of the percentages mentioned above have decreased in recent years.

Can You Put Less than 20% Down?

A down payment of 20% isn’t needed in most cases. However, making a lower down payment means that you’ll have a higher monthly mortgage payment because of an increased interest rate, a larger loan amount, and the need to purchase private mortgage insurance. Your offer might also be less appealing to the seller if they have received multiple bids with more substantial down payments.

A down payment can be as low as 3% and might not even be required depending on the type of loan you apply for. If you qualify, USDA and VA loans are sometimes able to provide 100% financing. Keep in mind that your interest rates will be high.

The exact amount of down payment you make for a new home depends on numerous factors, which include your current financial goals and your household balance sheet. Taking these factors into account should help you arrive at an answer that fits your situation.

Benefits of a 20% Down Payment

If you’re able to afford a 20% down payment, you’ll receive some tangible benefits. For one, putting more money down on a home means that your mortgage payment should be lower. The lender also doesn’t need to finance as much. Your risk will drop as well, which makes it more likely that your lender will provide you with good interest rates.

In the event that your down payment is 20% or higher, you’ll no longer need to pay for private mortgage insurance, which is a requirement that most lenders maintain. The insurance premiums would otherwise be added to your monthly mortgage payment. Consider using a mortgage calculator before making an offer on a new home.

How to Reduce Your Down Payment

If you want to purchase a home with a relatively low down payment, different types of loans have different requirements on how to qualify for a low down payment. These requirements include:

  • Conventional loan – Conventional loans allow for a down payment of 3% if your credit score is at least 620
  • FHA loan – It’s possible to obtain an FHA loan with a down payment of 3.5%
  • USDA loan – These loans are provided for homes in rural areas, which is why a down payment isn’t always needed
  • VA loan – These loans can be obtained by veterans and active service members without any down payment

Now that home prices have increased rapidly over the past two years, there’s no need to make a down payment of 20% or more. Making a lower down payment that you can afford gives you the opportunity to buy a new home without needing to save up for years.