How to Buy a Home with Less than 20% Down!
- Trish Santos
- 4 days ago
- 4 min read
Buying a home often feels like a huge financial mountain to climb. One of the biggest hurdles many people imagine is the need to put down 20% of the home's price upfront. This idea is so common that it has become almost a rule in the minds of many homebuyers. But here’s the truth: you don’t always need to pay 20% down on a conventional loan. In fact, putting down less can open doors to homeownership sooner than you think.
This post will explain why the 20% down payment myth exists, how conventional loans work with smaller down payments, and how you can make this work for your home buying journey. Let’s break it down in simple terms.
The 20% Down Payment Myth
Many people believe that a 20% down payment is mandatory for a conventional loan. This belief comes from a few sources:
Private Mortgage Insurance (PMI): Lenders require PMI if you put down less than 20%, which adds to your monthly costs.
Financial advice: Some experts recommend 20% to avoid PMI and get better loan terms.
Historical norms: In the past, larger down payments were more common.
While these points have some truth, they don’t mean you must save 20% before buying a home. Today’s lending environment offers more flexibility.
What Is a Conventional Loan?
A conventional loan is a mortgage not insured or guaranteed by the government. It’s offered by private lenders like banks and credit unions. These loans usually have stricter credit and income requirements than government-backed loans but often come with competitive interest rates.
Conventional loans can be used for:
Primary residences
Second homes
Investment properties (with different rules)
The key takeaway is that conventional loans do not require a 20% down payment by rule. Instead, lenders set minimum down payment requirements based on your financial profile and the loan program.
How Much Down Payment Do You Really Need?
With conventional loans, you can often put down as little as 3% to 5%. Here’s how it works:
3% down payment: Some conventional loan programs, like Fannie Mae’s HomeReady or Freddie Mac’s Home Possible, allow down payments as low as 3% for qualified buyers.
5% down payment: Many lenders offer conventional loans with 5% down, which is a common option for first-time buyers.
10% down payment: Putting down 10% can help you avoid PMI in some cases or reduce the amount you pay.
20% down payment: This is optional but can help you avoid PMI and lower your monthly payments.
Example
Imagine you want to buy a home priced at $300,000.
20% down means $60,000 upfront.
5% down means $15,000 upfront.
That’s a big difference in cash needed at closing.
What Is Private Mortgage Insurance (PMI)?
PMI is an insurance policy that protects the lender if you stop making payments. It’s required when your down payment is less than 20% on a conventional loan.
PMI adds to your monthly mortgage payment.
The cost varies but typically ranges from 0.3% to 1.5% of the loan amount per year.
You can cancel PMI once you reach 20% equity in your home.
While PMI adds cost, it’s a trade-off that lets you buy a home sooner without waiting to save a huge down payment.
Benefits of Putting Down Less Than 20%
1. Buy Sooner
Saving 20% can take years, especially in high-priced markets. Putting down less means you can enter the market faster and start building equity.
2. Keep More Cash for Other Needs
A smaller down payment means you keep more money for moving costs, home repairs, or emergencies.
3. Take Advantage of Low Interest Rates
Interest rates fluctuate. Waiting to save 20% might mean missing out on a low-rate environment.
4. Build Equity Over Time
Even with a smaller down payment, your home’s value can increase, building equity as you pay down the loan.
How to Qualify for a Low Down Payment Conventional Loan
Lenders look at several factors when approving a loan with a low down payment:
Credit score: Generally, a score of 620 or higher is needed. Higher scores improve your chances.
Debt-to-income ratio (DTI): Lenders prefer your monthly debts to be less than 43% of your income.
Stable income: Proof of steady employment and income is essential.
Savings: Even with a low down payment, lenders want to see reserves for emergencies.
Programs like Fannie Mae’s HomeReady and Freddie Mac’s Home Possible are designed to help buyers with moderate incomes and smaller down payments.
Tips to Make a Low Down Payment Work for You
1. Shop Around for Lenders
Different lenders have different rules and offers. Some specialize in low down payment loans.
2. Consider Down Payment Assistance Programs
Many states and local governments offer grants or loans to help with down payments.
3. Improve Your Credit Score
A higher credit score can get you better loan terms and lower PMI costs.
4. Budget for PMI
Include PMI in your monthly budget so you’re prepared for the extra cost.
5. Plan to Pay Off PMI Early
Make extra payments or refinance once you have 20% equity to remove PMI.
When Might a 20% Down Payment Still Make Sense?
Putting down 20% can be a smart choice if:
You want to avoid PMI and lower monthly payments.
You have enough savings without depleting your emergency fund.
You plan to stay in the home long term.
You want to build equity quickly.
But it’s not the only path to homeownership.
Real-Life Example: Sarah’s Home Purchase
Sarah wanted to buy a $250,000 home but only had $12,500 saved for a down payment (5%). She qualified for a conventional loan with PMI.
Her monthly mortgage payment was higher due to PMI.
She kept $10,000 in savings for moving and repairs.
After 3 years, she refinanced when her home value increased and canceled PMI.
Sarah was happy she bought sooner rather than waiting years to save 20%.
Final Thoughts
You don’t have to wait years to save a 20% down payment to buy a home with a conventional loan. Many programs and lenders allow much smaller down payments, making homeownership more accessible. While PMI adds some cost, it’s a small price to pay for getting into your home sooner and starting to build equity.
If you’re ready to buy, explore your loan options, check your credit, and talk to lenders about low down payment programs. Homeownership is within reach, and you don’t need to wait to make it happen.
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