Is a 20% down payment needed to purchase a home?

Happy young couple moving into new home

If you’re in the market for a home you’ve likely heard that you need to save twenty percent for a down payment before you can buy. While there are advantages to a larger down payment, it’s a myth that twenty percent is a requirement. In fact, the average down payment for first-time homebuyers is much less.1 Here’s what you need to know about the pros and cons of putting twenty percent down as well as smart saving strategies from industry experts.

Pros of a larger down payment

Here are three advantages of putting twenty percent or more down.

  1. Lower monthly payments. One of the most significant advantages of a larger down payment is that you’ll start out with a smaller loan balance, which can contribute to making your monthly payments lower
  2. No private mortgage insurance (PMI). If you buy a house with 20% down payment or more, you will likely avoid monthly PMI, which can add to your monthly housing costs.2
  3. Better interest rates. According to HSH Associates, “lenders tend to compensate for making riskier loans by charging higher interest rates.” Because a larger down payment reduces your lender’s risk, you might qualify for a lower interest rate.

Cons of putting twenty percent or more down

Along with the good reasons for a larger down payment, depending on your financial situation, there may also be drawbacks.

  1. More time spent waiting to buy. Is your goal to buy a home in the next few years but your biggest obstacle is a large down payment? When you weigh the costs of buying over renting, it may be financially advantageous to buy now instead of waiting until you’ve saved more for an up-front payment. Use the Freddie Mac Rent vs. Buy calculator to crunch the numbers and determine what makes the most sense for you.
  2. You might be left with no financial cushion. Another disadvantage of a more substantial down payment is the potential of depleting your emergency savings fund.
  3. No cash on hand for maintenance. All homes require some level of ongoing upkeep. The larger the down payment, the fewer resources you’ll have available for inevitable repairs or maintenance.3

How to save for a down payment

Regardless of the size, there are steps you can take to save for a down payment. Here are some smart saving strategies from industry experts.

  • Personal finance site Money Under 30 recommends figuring out how much you’ll need to save by sitting down with a mortgage lender “who will let you know how much of a mortgage you can qualify for.”4
  • Moving.com advises opening up a new savings account that’s only for your down payment and signing up for an automatic savings plan.5
  • “Trim those quiet, unnecessary expenses,” instructs Realtor.com. Cost-cutting measures could include cutting your gym membership, packing your lunch, turning down your thermostat and biking to work.6
  • At Guild Mortgage, we believe that the best way to save is to have a plan and stick to it. Follow these seven steps for setting up a budget, so you’re in control, not your money.
  • Did you know that your down payment doesn’t have to only come from your own funds?7 Freddie Mac writes that “your down payment can come from a number of sources, including personal funds, gift funds, grants and affordable second mortgages.” Also, widely available down payment assistance (DPA) programs are designed for homebuyers who can afford monthly mortgage payments but don’t have enough money for a down payment.

Regardless of the size of your down payment, it’s essential that you choose a loan that is best tailored to your needs. That’s why we offer hundreds of loan products for a wide array of borrower situations, including first-time buyers, military families and rural homebuyers. Find a loan that fits your life today.

The above information is for educational purposes only. All information, loan programs & interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply.

1Infographic: Downpayment Myths Debunked – National Association of Realtors

2How To Avoid Paying Private Mortgage Insurance (PMI) – The Mortgage Reports

3Down Payments: How They Work, How Much to Pay – the balance

4How To Best Save For A Down Payment On A House – Money Under 30

511 Ways to Save for a Down Payment – moving.com

6How to Save Money for a Down Payment and Closing Costs on a New House – Realtor.com

7The Facts (and Myths) on Down Payments and PMI– Freddie Mac