What happens when you put down less than 20 percent

You can buy a home with 3 to 5 percent down through conventional loans, or as little as 0 percent through VA or USDA programs if you meet the requirements. The trade-off is that lenders charge you mortgage insurance — a monthly fee added to your payment that protects them if you stop paying. This insurance costs between 0.5 and 1.5 percent of your loan amount per year, depending on how much you put down and your credit score.

A smaller down payment also means a larger loan. On a $300,000 home, putting down 5 percent instead of 20 percent means borrowing an extra $45,000, which increases your total interest paid over 30 years. The monthly payment difference is real, but so is the benefit: you can buy sooner instead than waiting years to save.

The lender will order an appraisal to confirm the home is worth what you are paying. If the appraisal comes in low, you may need to renegotiate the price, put down more cash, or walk away — the appraisal protects both of you.

Key Takeaways

  • Conventional loans allow down payments as low as 3 percent, but you will pay mortgage insurance monthly until you reach 20 percent equity.
  • VA loans (for military members and veterans) and USDA loans (for rural properties) can require zero down payment if you meet income and property requirements.
  • FHA loans require 3.5 percent down but have lower credit score requirements and are easier to get than conventional loans with the same down payment.
  • Your debt-to-income ratio — what you owe each month divided by what you earn — must usually stay below 43 percent, and lenders check this before approving you.
  • Mortgage insurance can be removed once you have 20 percent equity, but the timeline depends on whether your home value rises and how fast you pay down the loan.

Conventional loans: 3 to 5 percent down with mortgage insurance

A conventional loan is a mortgage that is not backed by the federal government. Lenders set their own rules, but most will lend to you with 3 percent down if your credit score is 620 or higher and your debt-to-income ratio is below 43 percent. The lower your down payment, the higher your mortgage insurance premium — at 3 percent down, you might pay 1.2 to 1.5 percent of the loan annually; at 5 percent, closer to 0.8 to 1.0 percent.

You can remove mortgage insurance once you reach 20 percent equity in the home. This happens through a combination of paying down the loan and the home gaining value. If you put down 5 percent and the home appreciates, you might hit 20 percent equity in 5 to 7 years. If the home does not appreciate or you pay slowly, it could take 10 to 15 years. You can request removal in writing once you hit that threshold, and the lender must comply.

Conventional loans typically require a down payment gift letter if family is giving you the money, proof that the gift is not a loan you have to repay, and documentation of where your down payment savings came from. Lenders want to confirm you did not borrow the down payment itself, which would increase your debt.

FHA loans: 3.5 percent down with lower credit requirements

An FHA loan is backed by the Federal Housing Administration and is designed for buyers with lower credit scores or less savings. The minimum down payment is 3.5 percent, and the credit score requirement is typically 580 or higher — lower than conventional loans. The catch is that FHA mortgage insurance is permanent: you pay it for the life of the loan if you put down less than 10 percent, even after you reach 20 percent equity.

FHA mortgage insurance has two parts: an upfront premium (usually 1.75 percent of the loan amount, rolled into your monthly payment) and an annual premium (0.55 to 0.8 percent depending on your loan size and down payment). The total cost is higher than conventional insurance, but the lower credit requirements make FHA the only option for some buyers.

FHA loans have stricter property requirements — the home must meet safety and livability standards, which means some older or distressed homes will not may have access to. The appraisal is more detailed than a conventional appraisal, and the lender will not approve the loan if the inspector finds major issues.

VA and USDA loans: Zero down payment options

If you are a military member, veteran, or surviving spouse, a VA loan requires zero down payment and no mortgage insurance. You pay a one-time funding fee (1.4 to 3.6 percent of the loan, depending on your military status and whether you have used VA benefits before), which is rolled into the loan. VA loans have no credit score minimum in the law, though most lenders require 620 or higher in practice.

A USDA loan is for rural properties and requires zero down payment if your household income is below 115 percent of the area median income. There is no mortgage insurance, but you pay a may provide fee (1 percent upfront, 0.35 percent annually). USDA loans are slower to process than conventional or FHA loans because the property must be in an may be able to access rural area, which the USDA verifies.

Both programs have income limits and property restrictions. VA loans work anywhere, but USDA loans only work in designated rural areas — you can check if a property qualifies on the USDA website. If you are may be able to access for either program, the zero down payment and lack of mortgage insurance make them the cheapest option, even with the upfront fees.

How lenders decide whether to approve you

Lenders look at three main things: your credit score, your debt-to-income ratio, and your down payment amount. Your credit score reflects your history of paying bills on time. Scores of 740 and above get the best interest rates; 620 to 680 will get you approved but at a higher rate; below 620, you are limited to FHA or VA loans.

Your debt-to-income ratio is your total monthly debt payments (car loans, credit cards, student loans, the new mortgage) divided by your gross monthly income. Most lenders want this below 43 percent. If you earn $5,000 a month, your total debt payments should not exceed $2,150. This includes the mortgage payment you are about to take on, so lenders calculate what your payment would be and add it to your existing debts.

Your down payment is the cash you bring to closing. Lenders want to see where this money came from — bank statements showing the balance for the past two months, proof of a gift from family (with a signed letter saying it is not a loan), or documentation of a recent inheritance. If you cannot explain the source, the lender will not approve the loan.

Removing mortgage insurance and building equity faster

Mortgage insurance is not permanent on conventional or FHA loans with 10 percent or more down — it drops off automatically once you reach 20 percent equity. On conventional loans with less than 10 percent down, you can request removal in writing once you hit 20 percent equity, and the lender must remove it. On FHA loans with less than 10 percent down, the insurance stays for the life of the loan.

You build equity two ways: by paying down the principal (the amount you borrowed) and by the home gaining value. If you put down 5 percent on a $300,000 home and make extra principal payments, you could reach 20 percent equity in 7 to 10 years instead of 15. Refinancing into a new loan when rates drop can also speed this up, though you will pay closing costs again.

Some buyers put down 5 percent, plan to remove insurance at 20 percent equity, and then refinance into a conventional loan without insurance once they reach that point. This strategy works if home values are stable or rising and you can afford the payments. If the home loses value or you cannot make extra payments, you could be stuck with insurance for much longer.

What to expect at closing and after

Closing is the final step where you sign documents, transfer funds, and officially own the home. With a low down payment, closing costs (title insurance, appraisal, lender fees, attorney fees) typically run 2 to 5 percent of the purchase price. Some lenders allow you to roll closing costs into the loan, which means you do not pay them upfront but you pay interest on them over 30 years.

After closing, your monthly payment includes principal, interest, property taxes, homeowners insurance, and mortgage insurance (if applicable). On a $300,000 home with 5 percent down at current rates, your payment might be $1,800 to $2,000 per month depending on your credit score, the interest rate, and your location. This is the payment you need to budget for — not just the principal and interest.

If you fall behind on payments, the lender can foreclose and take the home. With a low down payment, you have less equity cushion, so foreclosure happens faster. Stay current on your payments, keep your homeowners insurance active, and pay your property taxes on time.

Frequently Asked Questions

Can I use a gift from family for my down payment?

Yes, but the lender requires a signed gift letter from the family member stating the money is a gift, not a loan you have to repay. You will also need bank statements showing the gift was deposited into your account. Some lenders limit how much of your down payment can be a gift — typically 100 percent on FHA loans, but only 20 percent on some conventional loans.

What if my credit score is below 620?

FHA loans accept credit scores as low as 580, and VA loans have no minimum in the law (though lenders typically require 620). If your score is below 580, you may need to wait and build credit before buying, or work with a credit counselor to dispute errors on your report. Paying down existing debt and making on-time payments for several months can raise your score.

How long does it take to get approved with a low down payment?

Conventional loans typically take 30 to 45 days from process to closing. FHA loans take 40 to 60 days because the appraisal is more detailed. USDA loans can take 60 to 90 days because the property must be verified as rural-may be able to access. VA loans are usually 30 to 45 days. These timelines assume you provide documents quickly and the appraisal comes back without issues.

What happens if the home appraises for less than the purchase price?

If the appraisal is lower than what you agreed to pay, you have three options: renegotiate the price down with the seller, put down more cash to make up the difference, or walk away. The lender will not lend more than the appraised value, so you cannot borrow your way out of this problem. This is why the appraisal protects you — it prevents you from overpaying.

Can I remove mortgage insurance before reaching 20 percent equity?

On conventional loans, no — you must reach 20 percent equity. On FHA loans with less than 10 percent down, the insurance is permanent and cannot be removed. On FHA loans with 10 percent or more down, insurance drops off automatically after 11 years. Refinancing into a new loan is the only way to remove insurance early, but you pay closing costs again.