A Smaller Down Payment Can Make Homeownership More Accessible in Today’s Market. Here’s What You Need to Know About the Tradeoffs

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Saving up for a down payment can be one of the biggest hurdles prospective homebuyers face, especially if they’re aiming to put down 20%. 

As home prices have steadily increased over the past few years — and they show no signs of coming down — saving for a 20% down payment has become even more challenging. As of March 2022, the median U.S. home listing price was $405,000, according to Realtor.com. If you wanted to put down 20%, you’d need a down payment of $81,000, not to mention thousands of dollars more to cover closing costs. 

Fortunately, you can buy a home with a lower down payment. In fact, some lenders will approve you for a conventional mortgage with only 3% down, and other types of mortgages can be had for no down payment at all. There are tradeoffs, including having to pay mortgage insurance, facing potentially higher interest rates and the prospect of loan costing more money over time. Depending on your situation, that might be worth the opportunity to get into the housing market sooner, experts say. 

What Is the Recommended Amount for a Down Payment to Buy a House?

Traditionally, experts have recommended putting down 20% for your down payment to reduce your loan amount, score a lower interest rate, and eliminate the cost of private mortgage insurance (PMI) that comes into play when you put down a smaller percentage. 

But affording 20% upfront can be cost-prohibitive for many homebuyers, and it’s not a requirement to qualify for a mortgage. In fact, the median down payment for homebuyers is 13%, according to the 2022 Home Buyers and Sellers Generational Trends Report from the National Association of Realtors (NAR). 

What’s more, there are both pros and cons to putting down a 20% down payment, which is why experts recommend opting for an amount that works for you. 

“There is no one size fits all answer,” says Nadia Evangelou, senior economist and director of forecasting at NAR. “The right down payment amount depends on someone’s financial situation.”

Here are some examples of what a 10% or 20% down payment would like on a few different home loan amounts. 

Down Payment Cost Examples:

Home Value20% Down Payment10% Down Payment
$200,000$40,000$20,000
$300,000$60,000$30,000
$400,000$80,000$40,000
$500,000$100,000$50,000

What If I Can’t Afford a 20% Down Payment?

If you can’t afford a 20% down payment, that doesn’t mean you have to give up on your goal of homeownership. Here are some options that could help:

Make an Offer Anyway 

With rising home values, many would-be homebuyers are opting to put down a smaller down payment now so they can start building equity ASAP

“A lot of times, when we’re talking with clients, especially first-time homebuyers who are actively trying to save up for a 20% down payment, we recommend doing a smaller down payment so they can get in the market now,” says Emily Waldmann, a real estate agent at DEN Property Group. “Based on where we are in Austin, Texas, [home prices are] appreciating so quickly that by the time they have 20%, they’re likely going to be priced out of that home price bracket. So we describe it as a river — jump in where you can, it’s all going downstream.”

If you can qualify for a mortgage with a lower down payment, it might make sense to buy a home sooner rather than later. Ultimately, Waldmann suggests doing a cost-benefit analysis to determine the best course of action. 

“Do you want to pay a larger down payment upfront to make your monthly payments a little bit lower, if that’s better for your personal budget?” asked Waldmann. “Or do you want to do 3% down, or 5% or 7%, anything in that range, and then have a slightly higher monthly payment, but you’ll get into the housing market earlier and could see more long-term gains?” 

Wait to Buy and Save

If you would prefer to put down 20%, you could wait to buy a home and save for your down payment. To save up fast, consider ways to slash your spending or increase your income by requesting a raise at work or working a side hustle

You might also pay down credit card debt so you’re not wasting money on high interest charges. It can also help to automate your savings into an account specifically designated for your down payment. 

Although these strategies can help, keep in mind that you might be chasing a moving target. As home prices increase, the amount you’ll need to save to hit 20% could go up as well. 

Pro Tip

If you decide to wait a bit and save up 20%, look at ways to boost your income, such as asking for a raise or working a side hustle. Also look at paying down credit card debt, which will help you when you start applying for mortgages.

Pursue First-Time Homebuyer Grants

If you’re a first-time homebuyer, you might qualify for grants or down payment assistance programs from your state, county, or municipality. These programs offer grants to help with a down payment or closing costs. 

Some also provide low-interest loans that don’t require you to make payments for a few years. To qualify, you typically need to show that your income falls below a certain threshold, as well as meet any credit score requirements. 

Apply for Non-Conventional Loans 

Government-sponsored enterprises, such as Fannie Mae and Freddie Mac, provide mortgages with only 3% down. Veterans and active service members can qualify for a VA loan with 0% down. 

Depending on your circumstances, you might be able to get a non-conventional loan with only a small down payment — or none at all. 

What Is the Minimum Down Payment to Buy a House?

The minimum down payment for a house will vary depending on the lender and loan type. 

FHA Loans

FHA-approved lenders issue mortgages that are insured by the Federal Housing Administration to borrowers with a down payment of 3.5%. You’ll need to have a low to moderate income and a credit score of 580 or higher. Borrowers with lower credit scores may still be able to get an FHA loan, but they’ll need to provide a higher down payment of 10%. FHA loans do come with mortgage insurance, adding an extra amount to your bill that doesn’t count toward the principal on the loan. Unlike with private mortgage insurance on conventional loans, mortgage insurance on FHA loans can’t be canceled after you reach a certain threshold of equity. Instead, you’ll have to refinance to get rid of it.

USDA Loans

If you’re looking to settle down in a rural area, you might get help from the U.S. Department of Agriculture. USDA loans are available to borrowers with low to moderate income and a credit score of 640 or higher. If your credit score falls below that threshold, you might still be able to qualify by showing that you’ve made on-time payments on your rent and utilities. USDA loans offer 100% financing, meaning you don’t need any down payment at all.

VA Loans

VA loans through the U.S. Department of Veterans Affairs are another option for a 0% down mortgage. These loans are available to veterans and active military, and they are typically free from PMI charges. VA Native American Direct Loans (NADL) are also available to veterans who are Native American or who have a spouse who is Native American. Similar to VA loans, NADL loans don’t require a down payment or PMI, and they limit closing costs. 

Conventional Loans 

Conventional loans are not secured by the government, but rather are typically borrowed from a private lender, like a bank, credit union, or mortgage company. Note that Fannie Mae and Freddie Mac, which are government-sponsored, also offer conventional mortgages. You typically need a down payment of at least 3% to qualify for a conventional loan, though some lenders might set higher thresholds. Lenders will typically require private mortgage insurance, adding an extra cost that doesn’t count toward principal or interest. With a conventional loan, you can cancel PMI when you’ve reached 20% of the equity of your home. Experts recommend trying to reach that threshold quickly if you have PMI on a conventional mortgage, as it will save you money in the long run. Down payment requirements can also change if you’re not a first-time homebuyer, are purchasing a multi-unit dwelling or second home, are opting for an adjustable rate mortgage, or for other reasons. 

Pros and Cons of Paying 20% (or More) for a Down Payment

Paying 20% or more for a down payment is generally recommended if you can do it. One major benefit is that paying more upfront means you can take out a smaller mortgage and have more affordable monthly payments as a result. Plus, you won’t have to pay PMI, which can add thousands of dollars to your long-term costs. 

Lenders also tend to offer better interest rates to homebuyers who put down 20%, as a higher down payment lowers your loan-to-value (LTV) ratio. Finally, a higher down payment can make your offer more attractive to a seller, which could be helpful in today’s competitive market. 

“A larger down payment makes buyers more competitive, because buyers with large down payments are considered more reliable,” Evangelou says. 

At the same time, you might decide a 20% down payment isn’t worth draining your savings account if you plan to do home renovations, may need to cover an appraisal gap, or need cash on hand for other reasons. What’s more, waiting and saving for a 20% down payment could mean you miss out on months or years of building equity

For the moment, experts expect home prices and mortgage rates to keep increasing. If you wait until you have a 20% down payment, you could end up being priced out of your current home market. 

“Keep in mind that it can take several years to save a 20% down payment, and with rising home prices, the amount increases as well,” Evangelou says. “I think that if you can buy a house with less money down and become a homeowner sooner, that’s the best thing to do.” 

This chart shows the long-term costs of a 30-year mortgage on a $350,000 house with a 20% down payment and a 5% down payment.

Down Payment %Down Payment Amount Loan Balance After Down PaymentMortgage RateTotal Interest Paid Over 30 YearsWill PMI Apply?Total Loan Cost  + Interest 
20% Down Payment$70,000$280,0004.2%$213,018.46No$493,018.46
5% Down Payment$17,500$332,5004.5%$274,293.59Yes*$606,793.59
*The average cost of PMI is 0.58% to 1.86% of the loan, which can add an additional $30 to $70 per month per $100,000 to a mortgage payment.  

Home loan comparison calculator

Compare your payment options side-by-side to see which is right for you and your financial situation.

Find the mortgage that’s best for you by comparing the cost of multiple loans over time.

Pros

  • Could get a better mortgage rate, meaning more affordable monthly payments and less interest paid over the life of the loan

  • Can borrow a smaller mortgage

  • Will have more equity in your home from the start

  • Won’t have to pay PMI

  • May appear more competitive to sellers

Cons

  • Will have less cash left over for unexpected expenses, renovations, or anything else

  • Waiting to save could mean higher home prices and mortgage rates in the future

  • Won’t be building equity while you wait

  • May not have enough cash on hand to cover an appraisal gap in instances of a waived appraisal contingency