You don’t need a 20% down payment to buy a house, economists say

Saving for a down payment can be a daunting task for anyone dreaming of buying a home, but many people are already working toward that goal.

About 77% of future homebuyers have started saving for a down payment, according to a new survey from housing and real estate research site Clever.com.

More than half, or 57%, of prospective buyers plan to put down less than 20% of their home, according to the report, which surveyed 920 recent and prospective homebuyers in early April.

While buyers may be tempted to put down a larger down payment to avoid mortgage insurance premiums and lower their monthly payments, 20 percent is “absolutely not necessary,” said Daniel Hale, chief economist at Realtor.com.

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The average down payment in the first quarter of this year was 13.6%, up from 10.7% in the first quarter of 2020, according to Realtor.com.

A survey by the National Association of Realtors found that based on transactions from July 2022 to June 2023, the average down payment for first-time homebuyers in 2023 was 8%, compared to 19% for repeat buyers.

Even at its recent high levels, the average down payment is still well below 20 percent, the percentage that people typically consider to be the maximum when buying a home.

“This is by no means the law of the land,” said Mark Hamrick, senior economic analyst at Bankrate.com.

One way to lower your monthly mortgage payment is to make a larger down payment to reduce the amount you borrow, but for many families, saving a large down payment is difficult, Hale explained.

“It really shows that the housing market is facing challenges with not many affordable properties available,” she said.

Having enough savings for a down payment is a big hurdle for most buyers: Nearly 40% of Americans who don’t own a home cite a lack of savings for a down payment as the reason, according to the 2023 CNBC Your Money Poll conducted by SurveyMonkey. More than 4,300 U.S. adults were surveyed in late August for the report.

Rising home prices make the 20% target especially difficult, but experts say in reality it’s not necessary.

Nationwide, the average down payment on a home purchase is closer to 10% or 15%, Hale said. In some states, the average is well below 20%, and in some cases even below 10%, he said.

“Not only is it possible to purchase a home with less than 20 percent down, but the data shows that the vast majority of buyers actually do so,” Hale said.

There are several loans and programs available to assist buyers interested in purchasing a home with a small down payment.

For example, the Department of Veterans Affairs offers a VA loan program that allows those who qualify to purchase with as little as 0% down payment, and U.S. Department of Agriculture loans, known as USDA loans, are aimed at helping buyers purchasing homes in rural areas and also offer a 0% down payment option.

Federal Housing Administration loans, which qualifying borrowers can borrow with down payments as low as 3.5 percent, are available to first-time homebuyers, low- and moderate-income buyers and buyers from minority groups. Hale said they were “designed to close the homeownership gap for these targeted populations.”

Even with a conventional loan, the down payment required can be between 3% and 5%, depending on the buyer’s credit score and other factors.

“We have options,” Hale said.

When deciding how much you can afford to make a down payment, use your judgement carefully: A smaller down payment can mean additional costs. Making a smaller down payment is one way to “address affordability challenges,” but it can be “a mix of good and bad,” says Hamrick.

A smaller down payment means you’ll borrow more from a lender, which means your monthly mortgage payment will go up, Hale says. With a smaller down payment, you might not qualify for a lender’s best interest rate.

If you borrow more than 80 percent of the home’s value, you may also incur the additional cost of private mortgage insurance (PMI).

According to The Mortgage Reports, the cost of PMI typically ranges between 0.5% and 1.5% of the loan amount per year, depending on a variety of factors, including your credit score and the size of your down payment.

For example, on a $300,000 loan, mortgage insurance premiums could cost about $1,500 to $4,500 per year, or $125 to $375 per month, the site noted.

Typically, lenders will automatically cancel mortgage insurance once you reach 22% equity on your loan, and you can request cancellation once you reach 20% equity.

Hale said in some cases, buyers may choose to do what’s known as a “piggyback mortgage,” taking out a second mortgage to meet the 20 percent threshold and avoid having to pay mortgage insurance.

But second loans tend to come with higher mortgage rates, she said.