The 20% down payment rule is conventional wisdom, but it's not always necessary—or even advisable. Understanding your down payment options helps you buy a home sooner while making smart financial decisions.
This guide covers down payment requirements, PMI, assistance programs, and strategies to save for your first home purchase.
The 20% Down Payment Myth
While 20% down is ideal, it's not required. Many buyers put down 3-10% and still get competitive rates. The key is understanding the trade-offs.
Benefits of 20% Down
- No Private Mortgage Insurance (PMI)
- Lower monthly payments
- Better interest rates (sometimes)
- More equity from day one
Downsides of Waiting for 20%
- Delays homeownership (may take years to save)
- Home prices may rise while you save
- Missed opportunity to build equity
- Rent payments continue (no equity building)
If home prices are rising 5% annually and you need 2 more years to save 20%, you may need to save even more as prices increase. Sometimes buying sooner with less down makes sense.
Down Payment Options by Loan Type
Conventional Loans
- Minimum: 3% (Conventional 97 program)
- Standard: 5-10%
- Ideal: 20% (avoids PMI)
- PMI required: If down payment < 20%
FHA Loans
- Minimum: 3.5% (with 580+ credit score)
- Alternative: 10% (with 500-579 credit score)
- PMI: Required for life of loan (or until refinance)
- Best for: First-time buyers, lower credit scores
VA Loans
- Minimum: 0% (for qualified veterans/active military)
- No PMI: Even with 0% down
- Funding fee: 1.4-3.6% (can be rolled into loan)
USDA Loans
- Minimum: 0% (for rural properties)
- Income limits: Must meet area income requirements
- Property location: Must be in eligible rural area
Understanding PMI (Private Mortgage Insurance)
PMI protects the lender if you default. It's required when your down payment is less than 20%.
Loan amount: $400,000
Down payment: 10% ($40,000)
PMI rate: 0.5% annually
Annual PMI: $1,800 ($150/month)
Until: You reach 20% equity (through payments or appreciation)
How to Remove PMI
- Automatic: When you reach 22% equity through payments
- Request: When you reach 20% equity (may require appraisal)
- Refinance: When you have 20% equity
Down Payment Assistance Programs
Many programs help first-time buyers with down payments:
State and Local Programs
- Grants: Free money (no repayment)
- Forgivable loans: Forgiven after living in home for set period
- Low-interest loans: Second mortgage for down payment
- Tax credits: Reduce tax burden
Employer Programs
- Some employers offer down payment assistance
- Check with HR about housing benefits
Nonprofit Programs
- Habitat for Humanity
- Local housing nonprofits
- Community development organizations
Down payment assistance programs vary by state, county, and city. Your real estate agent or lender can help you find programs in your area. Many programs have income limits and require homebuyer education.
Saving Strategies for Your Down Payment
1. Set Up Automatic Savings
Automate transfers to a dedicated savings account. Treat it like a bill payment.
2. Reduce Expenses
- Cut unnecessary subscriptions
- Reduce dining out
- Delay major purchases
- Negotiate bills (insurance, utilities)
3. Increase Income
- Side hustle or freelance work
- Ask for raise or promotion
- Sell unused items
- Rent out spare room (if applicable)
4. Use Windfalls
- Tax refunds
- Bonuses
- Gifts (from family, if allowed by lender)
- Inheritances
5. Consider Retirement Account Withdrawals
401(k) loan: Borrow from yourself, pay back with interest
IRA withdrawal: First-time buyers can withdraw $10,000 penalty-free (still pay taxes)
Warning: Only if absolutely necessary. Reduces retirement savings.
How Much Should You Actually Save?
Beyond the down payment, save for:
- Closing costs: 2-5% of purchase price
- Moving expenses: $1,000-5,000
- Immediate repairs: $500-5,000
- Emergency fund: 3-6 months expenses
- Furniture/appliances: $2,000-10,000
Home price: $400,000
Down payment (10%): $40,000
Closing costs (3%): $12,000
Moving/repairs: $3,000
Emergency fund: $15,000
Total needed: $70,000
When Lower Down Payment Makes Sense
- Rising home prices: Buy now before prices increase further
- Low interest rates: Lock in rates while available
- Strong income growth: Can pay down principal faster later
- Investment opportunities: Down payment could earn more invested elsewhere
- Life circumstances: Need to move for job, family, etc.
When to Wait for 20%
- Stable/declining market: Prices not rising quickly
- High PMI costs: PMI would be significant burden
- Uncertain income: Job situation unstable
- High debt: Should pay down debt first
- No emergency fund: Need safety net first
Get Affordability Analysis
Calculate exactly how much you need for down payment, closing costs, and total cash required for any property.
Calculate Your NeedsConclusion: The Right Down Payment for You
There's no one-size-fits-all answer. The right down payment depends on your financial situation, market conditions, and personal goals. Don't let the 20% rule prevent you from buying if you're ready—but don't rush into homeownership without adequate savings either.
The key is understanding all your options, calculating total costs (not just down payment), and making an informed decision based on your specific situation.
Focus on total cash needed (down payment + closing costs + reserves), not just the down payment percentage. A 10% down payment with adequate reserves is often better than 20% down with no emergency fund.