When you buy a home, a larger down payment can give you better terms on your mortgage. A 20% down payment is considered the gold standard, but it is out of reach for many homebuyers, and a 20% down payment is not required. Many lenders accept a down payment of 5% or less. Let’s see how long it might take you to save for a 20% down payment versus 5%, depending on where you live.
Many experts recommend that home buyers save at least a 20% down payment, as it helps them avoid paying private mortgage insurance. PMI is a fee that is typically added to your monthly mortgage payment if you apply for a conventional loan with a down payment of less than 20%.
A smaller down payment is riskier for the lender, so they charge PMI to protect themselves. It serves as an insurance policy that protects the lender in the event that the borrower defaults on their mortgage.
Several factors can influence the amount of PMI you pay, including the loan amount, loan type, credit score, and the amount of your down payment. Generally speaking, it could range from 0.20% to 2% of the original loan amount annually.
For example, if your PMI costs 0.3% and you take out a $400,000 mortgage, you would pay $1,200 annually or $100 per month.
“For larger loans, with a low down payment and less than perfect credit, PMI can be several hundred dollars a month, so avoiding it can be crucial for some borrowers,” Darren Tooley, senior loan officer at Cornerstone Financial Services, said by email. “However, for borrowers with excellent credit and lower debt-to-income ratios, the monthly PMI amount is typically much lower than people expect.”
PMI on conventional loans doesn’t last forever. You can request a cancellation once you reach 20% equity in your home. Otherwise, the lender must remove PMI from your mortgage once the outstanding loan balance reaches 78% of the original value of the property.
Yes, a 20% down payment helps you avoid PMI. However, paying so much up front isn’t always easy, especially as home prices have remained elevated since the COVID-19 pandemic began.
A recent analysis from US Mortgage Insurers crunched the numbers on how long it would take the average American to save for a 20% down payment versus a 5% down payment, and the company even factored estimated closing costs into its study.
The biggest discrepancies are in Washington, DC and Hawaii, where the difference between saving for a 20% versus 5% down payment is 33 years. California is not far behind at 32 years.
Iowa has the smallest difference, which is still a whopping 10 years.
At first, the benefits seem undeniable. Beyond avoiding PMI, you pay less in total interest and are more likely to qualify for lower mortgage rates with a 20% down payment.
Still, this goal may not make the most sense for everyone, especially if it takes decades to achieve. Tooley said that if a borrower can qualify for a mortgage and afford a home with a lower down payment, it rarely makes sense to wait to buy a home until they have a 20% down payment.
“In many cases where a borrower waits to buy a home to save the 20% down payment, the amount they would end up paying monthly would be the same or more than if they had (purchased) the home from the beginning and paid PMI,” Tooley said. “In cases where a borrower waited until they had a 20% down payment to avoid paying PMI and ended up saving it on their monthly payment… the amount of principal lost would be much greater than their monthly savings from avoiding PMI.”
Most home buyers don’t split 20%. For example, the typical down payment for first-time homebuyers in 2024 was just 9%, according to the National Association of Realtors®.
These are your options if you are looking for a smaller down payment.
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Conventional loans: The Fannie Mae HomeReady and Freddie Mac Home Possible programs require as little as 3% down for low- to moderate-income borrowers. Both institutions also offer programs that allow first-time homebuyers to pay just 3%. Otherwise, many mortgage lenders allow as little as 5% down on conventional mortgages.
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FHA Loans: The Federal Housing Administration allows borrowers with a credit score of at least 580 to put down a 3.5% down payment. If your score is between 500 and 579, you will need a 10% down payment.
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USDA Loans and VA Loans: Loans backed by the United States Department of Agriculture and the Department of Veterans Affairs require no down payment.
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Down Payment Assistance: The U.S. Department of Housing and Urban Development, along with state and local agencies, offers assistance with down payment and closing costs in the form of grants, forgivable loans, and subsidized housing. Check out the National Council of State Housing Agencies to find a local partner. Many mortgage lenders also offer assistance.
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1% Down Payment Programs: There are lenders that allow you to pay only 1% when applying for a conventional loan and the company covers the remaining 2%. There are popular mortgage lenders, such as Rocket Mortgage, that offer 1% down payment programs.
No, most mortgage lenders do not require a 20% down payment. Several types of home loans accept down payments ranging from 0% to 5%. However, you must pay mortgage insurance if you put less than 20% down on a conventional loan, and this amount is usually added to your monthly mortgage payment.
The minimum down payment requirement varies by lender and type of mortgage. Conventional loans may require as little as 3% down, but can be reserved for first-time homebuyers or those with limited income. Government-backed programs, such as FHA loans, also have more lenient requirements. The USDA and VA offer no-money-down mortgages.
The PMI amount is based on your loan, credit score, and down payment, among other factors. It can range from 0.20% to 2% of the loan value annually.
Laura Grace Tarpley Edited this article.