The 20% Home Down Payment Rule of Thumb

Can you buy a home with less than 20% down?

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Joyce Chan / The Balance

The 20% down payment rule of thumb is a way to manage your costs when buying a home. By making a down payment that’s at least 20% of the purchase price, you often avoid extra monthly expenses and pay less interest than somebody who buys with a smaller down payment.

Let’s review the rule in detail so you can make informed buying decisions, learn rationale behind the 20% figure, and explore alternatives so you can decide on the right down payment amount.

Key Takeaways

  • Your down payment affects your monthly housing payment and interest costs.
  • A down payment of 20% or more typically eliminates the need for private mortgage insurance (PMI).
  • It’s possible to buy with less than 20% down, and sometimes that’s a smart move.
  • Government-backed loan programs may make it easy to borrow with a smaller down payment.

What Is the 20% Down Payment Rule of Thumb? 

The 20% down payment rule suggests that you pay at least 20% of your home’s purchase price out of your own funds. You may borrow the rest of the money needed to complete the purchase. When you put down at least 20%, you can generally avoid paying for mortgage insurance.

How Does the 20% Down Payment Rule of Thumb Work?

As with all rules of thumb, the 20% down-payment rule provides a guideline to help you make decisions. It is not set in stone, and you can buy a home with a smaller down payment—especially with government-backed loan programs. But putting down at least 20% reduces the risk associated with your loan.

How to Calculate

To calculate the amount needed for a 20% down payment, multiply your home’s purchase price by 20% (or 0.20, which is the same as 20%). For example, the median home purchase price in the U.S. was $346,800 at the end of 2020. Multiply that number by 0.20 for a result of $69,360, which is your target down payment if you use this rule.

Play around with the numbers with our detailed mortgage calculator—it even includes taxes and other costs, so you can see how they affect your housing costs, too. 

Why Lenders Like Down Payments

One of the measures lenders use to evaluate risk is a loan-to-value ratio (LTV), which illustrates the loan value relative to your home’s appraised value. Using round numbers, if your home is worth $400,000 and you borrow $300,000, you have an LTV of 75%. A higher LTV represents a bigger risk for lenders.

If you’re unable to keep up with payments, lenders may foreclose on your home and sell the property. With a loan balance that’s 80% or less of the home’s value, there’s a decent chance that the lender can recoup the outstanding loan balance. But if you borrow 100% of the purchase price and your home loses value, the lender is more likely to lose money.

How Borrowers Benefit

Whenever you can reduce risk for your lender, you should benefit from better loan terms. As mentioned, you can avoid paying for mortgage insurance by putting down at least 20%. Depending on your loan, you might pay those mortgage insurance costs in the form of a higher monthly payment, a lump sum at your loan’s inception, or a combination of upfront and ongoing costs. 

Mortgage insurance increases your cost of buying a home, and you don’t benefit from this insurance—it protects your lender.

You might also get a better interest rate on your loan with a sizable down payment. Your interest rate and the loan balance determine your monthly payment, so keeping those low helps you minimize your required payment.

Grain of Salt

You can buy a home with less than 20% down, and that’s a common practice. According to the National Association of REALTORS (NAR), the median down payment in 2019 was just 12% of the home’s sale price, with roughly half of all borrowers putting down even less than that.

Government Loan Programs

There are several ways to buy a home with limited funds. Government-backed mortgage loans, in particular, enable you to borrow with little or no money down.

  • VA Loans: Loans through the U.S. Department of Veterans’ Affairs allow for a zero down payment. You don’t have to pay for mortgage insurance, but you may have an upfront funding fee on your loan.
  • USDA Loans: You can also buy with zero down through the U.S. Department of Agriculture (USDA), but those loans require mortgage insurance and an upfront funding fee.
  • FHA Loans: Mortgages backed by the Federal Housing Administration (FHA) require mortgage insurance and a down payment of at least 3.5%. 
  • Other programs: Depending on your circumstances, you might qualify for programs offered by local government bodies or other organizations. Those offerings might include down-payment assistance or other features that make it easier to buy a home with a small down payment.

Conventional Mortgages

You don’t necessarily need to use government programs when making a small down payment. For example, conventional loans might allow you to buy a home with 3% down, although you may need to meet specific criteria to qualify for those loans. Your income might need to be below a certain level, or you might need to be a first-time homebuyer for some programs.

Again, with conventional loans, you often pay for PMI when you put down less than 20%. That’s an extra expense that increases your overall cost of buying, and it may increase your monthly payment. As a result, it’s critical to evaluate whether it makes sense to buy with a small down payment. 

As your equity increases, it may be possible to remove monthly PMI charges.

How Much Should You Put Down on a Home?

The 20% rule of thumb is helpful guidance for minimizing the amount you pay to borrow. It’s a safe bet for avoiding mortgage insurance, and minimizing your loan balance keeps your monthly payment and interest charges relatively low. Still, there are times when buying with less than 20% down makes sense.

If you really need to buy a home and you don’t have 20% available in cash, it can still make sense to move forward with a purchase. That might be the case when housing prices are rising quickly and you’re reasonably certain that they’ll continue to rise. It’s always risky to predict price movements, but it can be frustrating to delay your purchase and watch home prices become unaffordable.

It might also make sense to pay less than 20% down if doing so would exhaust all of your savings. You might want to keep cash available for move-in expenses, repairs, and surprises that will inevitably arise once you’re in your new home. Ideally, you’ll have enough for a 20% down payment as well as additional expenses, but that’s not always feasible.

You can always put down more than 20%. Doing so allows you to reduce interest charges, and having a low monthly payment might provide peace of mind. You’re better-equipped to adapt to an unexpected job change or medical bill when you don’t have to worry about a big mortgage payment.

To decide on the right amount for your down payment, evaluate all the factors that affect your ability to buy. Consider the pros and cons of keeping your current living situation, and run the numbers on your buying costs if you put down more or less than 20%. If you know how much you can afford to budget for housing, you can select a down payment that results in a monthly payment (with or without mortgage insurance) you can live with.