Most People Don’t Put 20% Down to Buy a Home—But Should You?

published Oct 11, 2018
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You’re trying to save 20 percent to put down on your first home, but do you know exactly why you’re striving for that amount? Though you don’t need to put down that percentage of your home purchase price in order to buy, it does help in two major ways: It saves you money in the long run by shredding off interest and makes you a more attractive loan applicant. And while all that sounds like a great goal, it can feel impossibly to many. And even if you do find ways to save up that money, will you be sacrificing an otherwise fun and fulfilling life?

While 20 percent down may seem like the standard down payment, it’s actually far from that. According to the National Association of Realtors, in the last five years more than 70 percent of first-time home buyers (who didn’t pay all-cash)—and 54 percent of all buyers—made down payments of less than 20 percent.

What’s getting in the way of us hitting this savings goal? According to that same 2017 report, savings barriers varied amongst the age groups. Around 23 percent of respondents ages 36 and younger said that saving for a down payment was the most difficult task in the home buying process, often citing that student loan debt held them back. Respondents also pointed to credit card and car loan debt as stalling factors.

“There are very practical reasons why people say you should aim for 20 percent, but I know as a first-time buyer, that’s a lot of cash upfront,” says Farnoosh Torabi, personal finance journalist, host of the podcast “So Money,” and Chase Slate Financial Education Ambassador. “When you put that money down, your risk assessment goes down in a good way. In other words, you’re not seen as risky of a borrower as someone who has just five percent down.”

Putting down 20 percent means you won’t have to pay private mortgage insurance (PMI) and you’ll also likely get a better interest rate—two things that will give you a lower monthly mortgage payment. Additionally, having more secure financing will often sweeten your bid to help you get the home you want.

If you’re still figuring out how much money you want to put down on a home, here are some helpful factors to consider:

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Practice paying your new home payment

If you’re going to have a mortgage that’s greater than the cost of your current rent, pretend you already have that mortgage payment, suggests Paula Pant, host of the Afford Anything podcast.

Put that “payment” (or the difference between your current rent and your estimated future mortgage) into a savings account. “That will make you imitate the experience of having a bigger mortgage payment, and you can see what that experience feels like in your life,” Pant says. “If after a month or two you think, ‘This is too stressful. The rest of my cash flow is too tight.’ Then, no harm no foul. You’ve just amassed some extra savings,” says Pant. Use that money later for moving and settling in expenses, she advises.

Avoid PMI to prepare for the unexpected

Most non-conforming loans and conventional mortgages with less than a 20 percent down payment will tack on private mortgage insurance (PMI). PMI protects the mortgage company if you default on your loan. PMI typically costs between 0.5 and 1 percent of the entire loan amount annually, according to Investopedia. That means on a $100,000 loan you could be paying $1,000 a year–or $83.33 per month (assuming that 1 percent PMI fee). Double that monthly number if your loan is $200,000, and so on.

Though $83.33 might not sound a lot per month to you right now, you shouldn’t discount how it might affect your expenses in the future. What if you need to take care of a sick family member, while you’re pregnant, and the car needs new tires, or, if you lose your job and the roof starts leaking? “That’s what concerns me about PMI, it’s not the $80 a month,” says Pant. You have to think about how you can afford this monthly payment over the next 15 or 30 years as you weather all kinds of bumps in the road—financially and personally.

“A major purchase and a long-term commitment should not be based on whether or not at this particular snapshot in time you can meet the monthly payments,” Pant says. “The wiser decision-making framework would be if this purchase is something that you can live with for many years and is affordable enough that if major hiccups were to happen in the future.”

Establish your down payment goal and timeline

Consider working with a financial advisor before you begin searching for a home to get help saving for a down payment and to make sure you’re looking for a home you can afford.

“When my millennial clients come to me and we discuss their ultimate life goals, buying a home is almost always on their wish lists,” says Ziyah Esbenshade, financial advisor at Pell Wealth Partners in New York City. She’ll work with her clients by conducting an in-depth analysis of their income and expenses: “We identify opportunities for them to save for the down payment,” she says. “Once my clients identify the 20 percent down payment as a goal, then we look at their cash flow and we see how much they can save on a monthly basis,” she says. Then they set up a portion of the client’s paycheck to go to an outside account that’s solely for this goal.

The goal might be to save up that money over a three-year period, says Esbenshade. “Once we create their plan, people get really excited about it and when I meet with them a year later, they say, ‘I can’t believe how much money I had saved for this goal and it feels really attainable.’ There’s a sense of pride there,” she says.

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Improve your credit

Credit plays a big role in the home buying process. “I would recommend that you take your credit as seriously as your cash readiness,” says Torabi.

If your credit score is less than stellar, the time you take to save for your down payment is a great time to boost it. It will not only guarantee you get a loan, but also that you will save money in the process. “In order to get the lowest possible interest rate, you want to make sure that you have the best credit score,” Esbenshade says. Not sure what score to aim for? Check out what credit score is needed to buy a house.

Make sure you still have an emergency fund

All of our experts recommended having at least three months’ of expenses saved in your emergency fund for those unexpected occurrences we mentioned earlier. “I know there’s some people who like to push that a little bit further… but three months is a comfortable barometer,” says Pant.

Torabi echoes this, adding that she thinks digitally-savvy millennials would probably have a better chance of bouncing back after a layoff, and that a minimum of three and a maximum of six months’ of living expenses in savings would suffice.

Factor in life expenses

Before you decide which home you want to buy, consider what the next three, five, or 10 years may bring for you and your family. Do you want to take time off from work to stay home with children? That’ll impact your income and ability to make mortgage payments. Do you or your partner plan to go back to school full-time or part-time? Will you need a new car soon? That’s an expense you’ll need money for after you close on your home. These are all important decisions to consider when you’re considering using your savings and making monthly payments.

“Buy a home that is affordable under the circumstance that there is only one person earning money,” suggests Pant. “That actually does two things: One, it gives you the flexibility to have one parent stay at home. Two, if you break up, get a divorce, and then one person moves out and the other person is left with the home, it’s a more likely situation that the person who ends up keeping that home is going to be able to continue to afford that payment.”

While that endeavor might not be realistic for everyone buying a home based on a dual income, if you put away a solid portion of one person’s paycheck, you’ll have a hefty savings should one of you experience a job loss, need time off to care for a sick family member, require additional time off after a baby is born, or simply be better prepared for the big expenses life throws at you. Have a car that’s on it last legs? Pant suggests asking yourself if you can make the car survive for an additional one or two years, then get the car fixed so it’s running and try to make it last so you can use that other money towards your down payment and get the best mortgage you can. In the end, it will favor you financially to wait.

Torabi says to take on the mortgage that allows for some breathing room in your budget. “You’re putting money into what’s hopefully going to be an appreciating asset over time,” she says.

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Avoid tapping your retirement for the deposit

A recent report found that one in three millennials said they borrowed against their retirement accounts or withdrew from their 401(k) or IRA to get money for their home purchase.

The IRS allows limited penalty-free IRA withdrawals for a first-time home purchase of up to $10,000. And if you have had a Roth IRA for at least five years, you may have a little more leeway; you can always withdraw contributions tax- and penalty-free, but you’re still held to the $10,000 limit. The funds can be used for a first-time home purchase or closing costs.

However, this isn’t always advised: “I think withdrawing up to $10,000 from your Roth is a big mistake,” says Esbenshade. “Roth IRAs are like the gold standard in investing, especially when you’re young because the money grows tax-free your entire life, and then it comes out tax-free. If you have to touch retirement accounts, I think probably doing it in the form of a loan would be the best of the bad options. But the real goal is to try to get that down payment without taking our or hurting your retirement.” Her advice? It’s better to buck up and pay the PMI.

Consider first-time home buying loans

A Federal Housing Administration (FHA) loan is a government-backed mortgage designed to help first-time home buyers who don’t have as much money to put down on their home or who would struggle to receive a conventional loan. With an FHA loan, the down payment requirement is 3.5 percent for credit scores of 580 and up and 10 percent for credit scores of 500-579, according to an article on You’ll also be paying a special PMI—called the FHA mortgage insurance premium (MIP)—for either the life of the loan (if you put less than 10 percent down), or 11 years (if you put down more than 10 percent). You can cancel MIP, though by refinancing to a conventional loan.

Though this may seem like a lot, it’s actually a good option for many. Torabi says it’s a different path to homeownership for first-time buyers of a certain income who want to become homeowners and maybe don’t have as much cash upfront to do it. However, these should be taken on only if you’re not overextending yourself when it comes to the mortgage.

“Do your research,” Ebenshade echoes. “If you qualify for an FHA loan and you have a secure job, can afford your housing costs, and have that extra emergency fund set aside, then I think it’s worthwhile to explore it.”