Down Payment Myths That Trip Up Homebuyers

The 20% figure originates from conventional loan rules that eliminate the need for private mortgage insurance (PMI) at that threshold. It is a benchmark, not a legal floor. FHA loans (insured by the Federal Housing Administration) require as little as 3.5% down for borrowers with qualifying credit scores. Conventional loans backed by Fannie Mae and Freddie Mac offer programs at 3% down for eligible first-time and low-to-moderate-income buyers. VA loans for eligible veterans and active-duty service members, and USDA loans for qualifying rural buyers, can require zero down payment. The 20% myth discourages many capable buyers from even beginning the process.

In markets where home values have historically appreciated, the equity gained from buying earlier often outweighs the cost of PMI paid over a few years. Buyers who delay purchasing while saving a larger down payment may find that the target property's price has risen faster than their savings rate. PMI is not permanent — once a borrower's equity reaches 20% of the home's original appraised value, they can request cancellation under the Homeowners Protection Act. This calculus varies by market and individual circumstance, so running the numbers with a mortgage professional is worthwhile. See also our guide for first-time buyers for a fuller picture of what to prepare for.

Thousands of down payment assistance (DPA) programs exist across the country, administered by state housing finance agencies, local governments, nonprofits, and employers. Income limits often extend into moderate-income brackets — in some programs, a household earning well above the area median income still qualifies. Assistance can come as grants, forgivable loans, or deferred-payment second mortgages. The U.S. Department of Housing and Urban Development (HUD) maintains a directory of HUD-approved housing counselors who can identify programs available in a buyer's specific area.

Putting more down reduces the loan principal and monthly mortgage payment, but those funds are illiquid once committed. Money used for a larger down payment cannot simultaneously be invested, held as an emergency reserve, or applied to higher-interest debt. When mortgage rates are relatively low, some buyers — with guidance from a financial adviser — determine that investing surplus funds rather than applying them to a down payment generates better long-term outcomes. There is no universally correct answer; the decision depends on the buyer's full financial picture. For context on how broader financial habits interact with major purchases, our budgeting myths article addresses related misconceptions.

FHA, VA, conventional, and many state loan programs allow borrowers to use monetary gifts from family members, employers, or certain nonprofit organizations toward the down payment. Lenders require a gift letter confirming the funds are not a loan requiring repayment, along with documentation of the transfer. Eligibility rules vary by loan type — for example, conventional loans may require the borrower to contribute their own funds depending on the loan-to-value ratio. Buyers should discuss acceptable gift sources with their lender early in the process to avoid surprises.

Under the federal Homeowners Protection Act, borrowers can request PMI cancellation when their loan balance reaches 80% of the home's original appraised value — generally through a combination of regular payments and potential appreciation. Lenders are required by law to automatically terminate PMI when the balance reaches 78% of the original value, assuming the borrower is current on payments. FHA loans have different rules: MIP (mortgage insurance premium) may remain for the life of the loan depending on the down payment amount and loan term, which is a meaningful distinction to understand before choosing a loan type. Closing costs are a related area where buyers often lose money unnecessarily — see why buyers lose money at closing for details.