Do You Really Need to Put 20% Down on a House? Here's What Experts Say

If you’ve never purchased a home, chances are you’ve heard a lot of information that isn’t quite accurate. The idea that you need to make a certain amount of money to qualify, the idea that you can’t afford a home with these sky-high interest rates, or the idea that only cash offers are competitive. But what about putting 20% down on your home when buying?

“A common misconception is that a 20% down payment is always required to buy a home. That's simply not true,” says Nectar CEO and cofounder Derrick Barker. 

Here, experts weigh how a 20% down payment factors into home buying and what you can do about it.

Do You Need to Put 20% Down on a Home? 

In a word, no. Putting 20% cash down on a home isn’t a requirement for home buying, though it does have its advantages. 

“Many people believe that a 20% down payment is a mandatory requirement when purchasing a home,” says Cindy Raney, founder of Connecticut-based boutique real estate firm Cindy Raney & Team. "This perception often stems from traditional lending practices where putting down 20% allows borrowers to avoid private mortgage insurance (PMI), which protects lenders in case of default. However, it’s not always necessary to put down 20%.”

Barker points out that 20% is often required for conventional loans, but other loans exist. “Many loan programs allow for lower down payments, sometimes as low as 3% or even 0% for qualified buyers,” Barker explains. 

“Another misconception is that putting less than 20% down automatically means a higher interest rate. While it can sometimes play a factor, it's not the only one,” Barker says. “Lenders look at your overall financial picture, including your credit score, debt-to-income ratio, and employment history.”

Of course, putting more money down isn’t just a random benchmark for buyers. It also benefits them. “The more equity one holds, the better, as they assume less risk,” says agent Jeremy Kamm of Coldwell Banker Warburg.

Still, there are good reasons not to put that amount down. “Buyers who stretch as far as they can to purchase the best their money can buy without financially compromising themselves should consider all the factors involved with taking out a mortgage with less than a 20% down payment,” Kamm adds. “It is not necessarily a bad idea or a poor decision.”

Home Loan Options

If you’ve been preapproved for a home, you’ve likely learned a bit about the types of home loans available from traditional home loans to Federal Housing Administration (FHA) loans, U.S. Department of Agriculture (USDA) loans, and Department of Veteran Affairs (VA) loans. 

“FHA loans require as low as 3.5% down, while VA and USDA loans can be obtained with 0% down for qualified borrowers,” says Barker. “The pros are lower down payment requirements, and the cons can include stricter eligibility criteria, higher interest rates, and additional fees.”

There are also programs that can help, including down payment assistance programs. 

“State and local governments often have first-time homebuyer programs, and some employers even offer assistance,” Barker adds. “Non-profit organizations can also be a resource. Do your research and see what's available in your area. A good mortgage broker can usually help you find the one that fits your situation.”

Raney says these loans have much lower down payment requirements, making it easier for a wider group of homebuyers to enter the market. FHA loans require as little as 3.5% down while she says some conventional loans start as low as 5%. 

“Buyers with strong credit may find that their interest rates remain competitive, even with a smaller down payment,” Raney adds.

These smaller down payment requirements aren’t just great for those who can’t afford a 20% down payment, but they’re also a good option for those who would like to hold onto their cash savings. 

“A smaller down payment could allow buyers to retain more cash for other needs, such as home improvements, moving expenses, or emergency savings,” Raney adds. “For instance, a 5% down payment on that same $100,000 home would require just $5,000, freeing up $15,000 that could be invested or used to cover unforeseen costs.”

Pros and Cons to a 20% Down Payment

There are definite bonuses and drawbacks to putting 20% down on your home purchase, even if it isn’t required. 

Advantages

“Putting 20% down has some definite advantages,” Barker says. “First, you'll avoid Private Mortgage Insurance (PMI), which is an added cost that protects the lender if you default on your loan.” PMI, like other types of home insurance and interest rates can significantly impact your buying power. 

“Second, a larger down payment means a smaller loan amount, which translates to lower monthly payments and less interest paid over the life of the loan,” Barker adds. “Finally, starting with more equity in your home can give you a stronger financial footing.”

As an example, Barker suggests looking at a $300,000 home purchase with a 20% down payment of $60,000. A loan for that home would amount to $240,000, and with a 6% interest rate over 30 years, you’d pay about $1,440 a month in principal and interest payments. 

“With 10% down ($30,000), your loan is $270,000, and the same terms result in a monthly payment of around $1,620,” he adds. “Over 30 years, you'll pay significantly more in interest with the smaller down payment.”

Another bonus: sellers might prefer that buyers put more down. “In many instances, sellers feel that someone who is able to make at least a 20% down payment represents a better offer—whether or not this is true is up for debate but definitely worth keeping in mind, especially in a competitive market,” says Sarah Alvarez, vice president of mortgage banking at William Raveis Mortgage. 

Lyn Landrian, an associate broker with Better Homes and Gardens Real Estate Wostal Realty agrees. "In a competitive market, like the ones we have experienced the past few years, your offer is much more attractive to a seller, you have more skin in the game,” she explains. 

Disadvantages

Of course, a downside to putting 20% down is that you’ll have less cash to address other problems with your home once you move in. If putting 20% down on a home means exhausting all of your cash savings, you might want to split the difference to ensure you have cash on hand for emergencies and new home necessities.

“Don't deplete your entire savings for the down payment; have some left for unexpected expenses,” Barker says.

Deciding how much to put down will come down to your own personal budget. “Consider your savings, income, expenses, and other financial goals,” Barker says. “Also, factor in closing costs, which can be significant.”

Experts agree it’s best to consult with your agent and lender to explore your options. 

“Ultimately, with the right guidance from real estate agents, buyers can navigate these financing options effectively,” says Rodrick McIntosh, broker and CEO with Better Homes and Gardens Real Estate Rhodes Realty. “By encouraging sellers to contribute the maximum allowable amount towards closing costs, agents can help buyers secure homes without needing a significant down payment, debunking the myth that 20% is essential for homeownership.”

Source: Kristine Gil, BHG.com