Down Payment Myths That Trip Up First-Time Buyers

The 20% figure persists because it's the threshold at which most conventional lenders waive PMI. But it was never a legal requirement. FHA loans — backed by the Federal Housing Administration — allow down payments as low as 3.5% for borrowers with qualifying credit scores. Conventional loans backed by Fannie Mae and Freddie Mac offer 3% down options for eligible first-time buyers. VA loans (for eligible veterans and service members) and USDA loans (for eligible rural buyers) can require no down payment at all. The 20% myth keeps many renters renting far longer than necessary.

PMI typically ranges from about 0.5% to 1.5% of the loan amount annually, added to your monthly payment. That's a real cost — but it trades off against years of additional rent payments while you save toward 20%. On conventional loans, lenders are required by the Homeowners Protection Act to cancel PMI once your loan-to-value ratio reaches 78%. You can also request cancellation at 80% LTV. For many buyers, buying earlier with PMI and building equity sooner comes out ahead financially — though the math depends on your market and situation.

Federal, state, and local programs — including those administered through the U.S. Department of Housing and Urban Development (HUD) — offer grants, forgivable loans, and deferred-payment loans to help with down payments and closing costs. Income thresholds vary considerably by program and region, and some are available to buyers earning median or even above-median area income. The Down Payment Resource database and HUD-approved housing counseling agencies are good starting points for researching what's available in your area. Many eligible buyers never apply simply because they assume they won't qualify.

Credit score requirements vary by loan type and lender. While a higher score generally unlocks better interest rates, imperfect credit doesn't automatically close the door on homeownership. FHA guidelines allow scores down to 580 for the minimum down payment tier. Individual lenders may set stricter standards (called "overlays"), so comparison shopping matters. If your credit needs work, credit score myths debunked is a useful next step — small actions like paying down revolving balances can move your score meaningfully in months.

A larger down payment lowers your loan balance, reduces or eliminates PMI, and can mean a better interest rate — those are real advantages. But liquidity matters too. Homeownership comes with immediate costs: closing costs (typically 2–5% of the loan amount), moving expenses, and the near-certainty of repair needs in the first year. Buyers who empty their savings at closing often turn to high-interest debt when the water heater fails or the roof leaks. Balancing down payment size against cash reserves is a nuanced decision worth discussing with a mortgage advisor.

Lenders evaluate your DTI — the share of your gross monthly income going toward debt payments — rather than disqualifying any particular debt type outright. Conventional loan guidelines typically look for a DTI at or below 43–45%, though some programs allow higher ratios with compensating factors. If your student loan payments are manageable relative to your income, they may not prevent approval. Income-driven repayment plans can lower the monthly payment figure used in DTI calculations, though lenders' treatment of those plans varies. See our homebuyer glossary for a plain-language explanation of DTI and other mortgage terms you'll encounter.