The 20% Down Payment Myth

There’s no reason to assume that the down payment for a house will always be 20%.

Although this may be true for conventional loans, it’s not the case for every situation. Many avenues exist for a lower down payment.

For example, with FHA loans, the down payments can be as low as 3.5%. With VA and USDA loans, there are no down payments needed.

The following is a summary for each loan type and the reasons behind their down payment percentages.

Conventional Loans

Conventional loans are not issued by a government entity. They are the most common loan type issued and typically cost less than FHAs.

These products are mainly for people who are financially secure and looking for a low-risk option with a larger down payment; they typically require a 20% down payment. If you pay less, you’ll need to pay for mortgage insurance.

FHA Loans

Insured by the Federal Housing Administration, FHA loans are issued to borrowers by private lenders.

With FHA loans, down payments can be as low as 3.5% and financially benefit those with low credit scores.

For people with a higher credit score, this type of mortgage can be more expensive than a conventional loan. Mortgage insurance is required for all FHA loans.

VA Loans

VA loans are offered to veterans, servicemembers and the surviving spouses of those who served.

These are completely backed by the Department of Veterans Affairs, with no down payment needed. For these borrowers, the VA offers low-cost, well-organized refinance methods and other protections if you are unable to pay your mortgage later.

USDA Loans

USDA loans are offered to low- and moderate-income borrowers living in rural areas. Since they’re backed by the Department of Agriculture, they can be beneficial to those who do not have much savings.

Like VA loans, there is no down payment needed for USDA loans. Borrowers still have to pay both an upfront fee and mortgage insurance.

The Choice

As you can see, there are plenty of loan options that do not force you to pay the assumed 20% down payment.

If you are unsure where you stand and wonder which choice would be the best for you, you can use Microsoft Corporation MSFT Excel’s Mortgage Templates to help you calculate and balance your mortgage options.