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The 20% myth: What you really need for your down payment

While many people still believe it's necessary to put down 20% when buying a home, that isn't always the case. In fact, lower down payment programs are making homeownership more affordable for new home buyers. In some cases, you might even be able to purchase a home with zero down.

How much down payment you'll need for a house depends on the loan you get. While there are benefits to putting down the traditional 20% — or more — it may not be required.

For many first-time homebuyers, this means the idea of buying their own house is within reach sooner than they think.

What is a down payment?

A down payment is the initial, upfront payment you make when purchasing a home. This money comes out of pocket from your personal savings or eligible gifts.

Traditionally, a mortgage down payment is at least 5% of a home's sale price. Down payments are often, but not always, part of the normal homebuying process.

If a buyer put 10-20% down, they may be more committed to the home and less likely to default.  If there is more equity in the property the lender is more likely able to recover its loss in the event of foreclosure.

Further, putting 20% down on your home when you purchase can help show the bank — and yourself — that you're financially ready to purchase a house.

A down payment on a house also protects you as the buyer. If you want to sell your home and the market drops, you might owe more on your property than it's worth. If you made a larger down payment when you purchased your house you may break even, or possibly make money when you sell.

Types of loans

You can choose from a wide variety of loans. However, the four common types of mortgage loan programs are:

1. Conventional Fixed-Rate Mortgages

With this type of mortgage, you keep the same interest rate for the life of the loan, which means the principal and interest portion of your monthly mortgage payment stays the same. These types of loans typically come in 10, 15, 20 or 30-year terms.

If you put less than 20% down on a conventional loan, you may need to pay private mortgage insurance (PMI). The most common way to cover this cost is to pay for it in a monthly premium that's added to your mortgage payment. PMI usually equals 1% of your loan balance per year. Many lenders offer conventional loans with PMI for down payments as low as 5%, and some as low as 3%.

2. Conventional Adjustable-Rate Mortgage (ARM)

Unlike a fixed-rate loan, an adjustable-rate mortgage has an interest rate that can go up or down based on market conditions. The down payment is typically between 3 and 20%, and will require PMI for buyers who put down less than 20%.

With an ARM, the initial rate is often lower than a fixed-rate loan. However, the interest rate may go up over time.

3. Federal Housing Administration (FHA) Loan

This is a type of loan insured by the federal government. An FHA loan is ideal for first-time buyers with less-than-perfect credit scores and offers down payments as low as 3.5%. Unlike conventional mortgages, mortgage insurance includes both an upfront amount and a monthly premium.

4. VA Loans

This type of loan is only available for U.S. military veterans and active-duty servicemembers.

VA loans are funded by a lender and guaranteed by the Department of Veterans Affairs. The primary benefit of pursuing this type of loan is it may not require a down payment.

How credit score impacts your down payment

Your credit score impacts on your loan and interest rate options. Buyers with credit scores as low as 500 might still be able to get a loan for a home, but they'll likely face higher interest rates and have fewer options. The higher your credit score, the lower your interest rate.

A strong credit score also means lenders are more likely to be lenient in areas where you may not be as strong, such as your down payment. Your credit score shows you have a proven history of making payments on time and that you’re less of a risk. In these instances, they might allow you to get a great interest rate while making a smaller down payment.

Benefits of putting more than 20% down

If you're able to do so, you may want to consider putting down a payment that's larger than 20%. Here are some of the benefits:

  • Lower monthly payment due to no mortgage insurance and smaller loan amount
  • Less interest paid over the life of the loan
  • More flexibility if you need to sell on short notice

Determining your down payment

How much do you need for a down payment, then? Use an affordability calculator to figure out how much you should save before purchasing a home. You can estimate the price of a home by putting in your monthly income, expenses and mortgage interest rate. You can adjust the loan terms to see additional price, loan and down payment estimates.

Here are some steps you can take before determining how much home you can afford and how much you can put down on a house:

1. Evaluate your budget

Review your current budget to determine how much you can afford, and how much you want to spend. Ask your lender about their requirements for how much of your pre-tax income you should spend on housing payments and other debts.

2. Assess your home needs

Ask yourself what you really need from your home. For example, do you plan to start a family? Do you have teenagers who will soon be moving out? These are all important considerations. You need to anticipate not only the stage of life you're in right now, but also what stage you'll be entering while in your home.

3. Consider your options

After evaluating your budget and what you need from your home, it's time to consider all your options. You might need to look for a loan option that allows a smaller down payment, or you might want to give yourself more time to save up for a larger down payment.

It can be beneficial to work with someone who knows the answers to all these questions. A home lending advisor can help you understand the different types of mortgages available and go over down payment requirements for each type of loan to find the right one for your financial situation.