If you’re planning to buy a new house, a big part of that is saving for a down payment. Your down payment is the money you put down when you close on a mortgage. Lenders will often describe down payments in terms of percentages.

A down payment represents what you initially own when you buy a home. Then, the remainder comes from your lender.

The standard is often referred to as 20%, but is that the reality?

Paying a 20% down payment may make you feel like ownership isn’t attainable for you, but is that truly how much you have to or should pay?

The following are considerations to keep in mind for your down payment.

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The Benefits of 20% Down

If you can put 20% down, there are certainly benefits.

First, you don’t have to buy private mortgage insurance or PMI. PMI is a form of protection for your lender if you default on your mortgage.

If you don’t put 20% down, but you reach a certain amount of equity, your lender might agree to cancel your PMI.

The more you can put down on a mortgage, the better the interest rates you’re likely to get.

The more money you pay as a down payment, the less of a risk a lender will see you as, and therefore the more attractive the terms they’re likely to offer.

If you were to put down 20% and get an interest rate that was, for example, two points lower, then you would save thousands of dollars over the life of your loan—the bigger your down payment, the smaller your monthly payments.  

Right now, despite the economic downturn caused by COVID-19, the real estate market remains competitive, and a larger down payment can also make you more compelling in the eyes of sellers.

If you’re buying in a hot market, that’s important.

The Downsides of Putting 20% Down

Not every lender will require 20% down, and there are downsides to a larger down payment.

One is that you’re taking more financial risk. You’re giving yourself less of an emergency fund if something unexpected happens, which can be a scary thought for some buyers. You’re leaving yourself with less money for any repairs or updates you might need to buy, and it could take years to save a 20% down payment.

Can You Buy a Home Without a Down Payment?

It is possible to buy a home with no down payment, but only with a government-backed loan. The federal government insures these loans, so they pose less risk to a lender.

Two of the most popular government-backed loans that don’t require a down payment are a VA loan and a USDA loan. VA loans are available to service members and veterans as well as some surviving spouses. USDA loans are for buyers in certain suburban and rural areas that qualify.

Does the Type of Loan Matter?

When you’re thinking about how much of a down payment you’ll need, the type of loan you’re likely to get is important.

A conventional loan for a primary residence leaves the down payment requirements up to the specific lender. You might find some lenders that require as little as 3% down, for example. Some lenders will offer lower down payment options for more qualified borrowers.

With an FHA loan, a down payment of at least 3.5% is required, and you need a credit score of at least 580. If your credit score is lower, you’ll have to put down at least 10%.

What all this means for potential buyers is that there are both pros and cons to the traditional 20% down payment guideline. You have to find what works for you financially and then shop around for loans that align with your needs. Not being able to make a 20% down payment doesn’t automatically count you out of buying a home, however.