Key takeaways
- Minimums: 0% for VA and USDA, 3% conventional for eligible buyers, 3.5% FHA.
- PMI on conventional loans is priced off credit score and loan-to-value and cancels at 78% LTV automatically.
- Waiting to reach 20% only wins if your savings rate outpaces price appreciation plus rent paid.
- Gift funds are allowed on most programs but must be documented with a gift letter and sourced.
The 20% myth and where it came from
Twenty percent is the threshold at which conventional loans stop requiring private mortgage insurance. It is not a legal requirement, not a lender requirement, and not the norm — the median first-time buyer down payment has sat in the high single digits for years.
The real question is whether the cost of PMI exceeds the cost of waiting. If homes in your market appreciate 4% annually and you are saving 3% of purchase price per year, waiting to reach 20% means chasing a target that recedes faster than you approach it, while paying rent the entire time.
How PMI is actually priced
Private mortgage insurance on conventional loans is priced on a grid: credit score across one axis, loan-to-value down the other. A 760-score borrower at 95% LTV pays a fraction of what a 640-score borrower pays at the same LTV. Improving your score before application often saves more than an extra 2% down payment.
You can request cancellation at 80% LTV based on the original value, and the servicer must terminate automatically at 78%. You can also order a new appraisal after improvements or appreciation and request removal based on current value — servicers permit this, usually after a seasoning period. Single-premium and lender-paid PMI structures exist and are worth comparing.
Gift funds, assistance, and reserves
Most programs allow gift funds from family members, and some allow gifts from employers or nonprofits. The paper trail matters: a signed gift letter stating the funds are not a loan, plus documentation of the transfer. Cash deposits without a source will be excluded from qualifying funds.
Down payment assistance exists in every state, usually administered by a housing finance agency, and takes the form of grants, forgivable second liens, or deferred-payment seconds. Most carry income limits and homebuyer education requirements. These programs are chronically underused.
Do not drain your reserves
A larger down payment lowers your payment and your total interest. It also converts liquid cash into illiquid equity that you can only access by selling or borrowing. Lenders want to see reserves after closing — typically two to six months of payments — and you want more than that.
The failure mode is buying at the maximum down payment you can scrape together, then financing a water heater on a credit card three months later. Keep an emergency fund that survives closing.
Frequently asked questions
Does a bigger down payment get me a better rate?
Yes, modestly. Conventional loan pricing includes loan-level price adjustments tied to LTV, so crossing thresholds at 80%, 75%, and 60% can improve your rate. The effect is usually smaller than the effect of credit score.
Can I borrow my down payment?
Not from an unsecured source that creates an undisclosed debt. You can borrow against a 401(k) or use a secured loan against an asset, both of which lenders will count in your DTI.
What about buying with 5% instead of 3%?
The monthly difference is small, but 5% down sometimes unlocks better PMI pricing and product options. Compare the actual PMI factors at both levels rather than assuming.
Sources & further reading
- Consumer Financial Protection Bureau, Mortgage Insurance
- Fannie Mae Selling Guide B7-1, Mortgage Insurance
- Homeownership Preservation Foundation state HFA directory
Figures and rules change. Verify current requirements with the issuing agency or a licensed professional before acting.