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Truity Credit Union Blog > March 2019 > The 20% Down Myth

The 20% Down Myth

  • 3/25/2019

If you’re eager to own a home of your own, you’ve probably heard you need to make a 20% down payment. The truth is, you don’t need to put down 20%.

A 20% down payment is generally the minimum to avoid paying private mortgage insurance (PMI). PMI is an insurance policy that protects the lending institution from early default on the mortgage. Let’s explore loan options that don’t require 20% down and take a more in-depth look at the pros and cons of making a smaller down payment.

Loan options

These are your government-backed loan options:

  • FHA mortgageThis loan, aimed at helping first-time homebuyers, requires putting down as little as 3.5%.
  • VA mortgageVA mortgages are the most forgiving, but are strictly for current and former military members. They require zero down and don’t necessitate mortgage insurance. 
  • USDA home loans: These loans also require zero down, but eligibility is location-based. Qualifying homes must be in sparsely-populated areas. 

For conventional loans, you can choose from the following:

  • 3% down mortgage: Many lenders will require putting as little as 3% down. Some even offer reduced mortgage insurance on these loans, with no income limits or first-time buyer requirements.
  • 5% down mortgage: Lots of lenders accept a 5% down payment. However, most require the buyer to have a FICO score of 680 or higher.
  • 10% down mortgage: Most lenders will accept a 10% down payment, even with a less-than-ideal credit score.

Each of these loans requires income eligibility, and most necessitate paying for PMI (Private Mortgage Insurance). However, there are ways that PMI can benefit the buyer as well.

Why make a smaller payment?

Are you waiting until you’ve saved 20%? You might want to reconsider. In the time it takes you to save, home prices may rise significantly. Mortgage interest rates may go up as well. Benefits of a smaller down payment include:

  • Conserve cash: You’ll have more money available to invest and save.
  • Pay off debt: Paying down high-interest credit card debt will improve your credit score and help you land a better mortgage rate.
  • Build an emergency fund: As a homeowner, having a well-stocked emergency fund is crucial.

Cons of smaller down payments

  • Mortgage insurance: PMI is an extra monthly expense.
  • Potentially higher mortgage rates: If you’re taking out a conventional loan with a smaller down payment, you’ll have a higher mortgage rate.
  • Less equity: A smaller down payment means having less equity in your home.

Before house-hunting, be sure you can afford to own a home. Ideally, your total monthly housing costs should amount to less than 28% of your monthly gross income. Ready to buy your dream home? Call, click or stop by today to learn about our mortgage rates!


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