Is a 20% down payment really necessary

Good news: You can buy a house with a smaller down payment than you might expect. Let's review some mortgages that allow lower down payments and look at the pros and cons of putting down 20%.

Loans that require less of a down payment

If you need to make a smaller down payment, these mortgages can help.

VA loans

Your military service allows you to have your mortgage guaranteed by the Veterans Affairs, or VA. These loans may permit you to finance a home purchase with no down payment. You also don't need private mortgage insurance, or PMI, which protects the lender if you default on the loan.

But you'll have to pay a VA funding fee. The fee varies depending on your military service, how much you put down, and whether this is the first time you've used your VA eligibility. Some people don't need to pay the funding fee, such as veterans receiving disability and the spouses of those who died in service.

You become eligible for a VA loan with 181 days of active-duty service during peacetime or 90 days during wartime. For those in the National Guard or Reserves, VA eligibility comes after six years of service.

Here are a few notes on VA loans:

• A VA loan may be right for those currently serving, veterans and eligible surviving spouses looking for a no down payment option.
• VA loan benefits can be reused.
• These loans typically have fewer closing costs, which may be paid by the seller.

30-year conventional loans

These loans allow you to put as little as 3% down on the purchase of a home. Unlike some loans, you can receive that 3% as a gift from a family member or other acceptable source, if you meet the gift requirements.

To qualify, you'll need to be a first-time homebuyer. But don't let the words "first time" mislead you. The government defines that term as someone who hasn't owned a home in the past three years. So, even if you've purchased 10 homes in your life, you're a first-timer in this program if you didn't own one of those homes in the past three years. Here are a few things to consider when deciding if a 30-year conventional loan is right for you:

• For borrowers paying less than 20% down, lenders may require PMI for lower down payments or credit scores, to reduce the potential risk of financial loss of defaulted loans.
• PMI is part of the monthly payment, but it can be removed once enough equity is achieved. The amount of PMI is determined by the down payment amount and credit scores.

FHA loans

These loans are designed to help lower-income and first-time buyers afford homeownership, but it's important to consider the long-term costs and eligibility requirements.

• Lower Down Payments and Credit Score Requirements: FHA loans, insured by the Federal Housing Administration, are popular among first-time homebuyers due to their lower minimum down payment (as low as 3.5%) and more lenient credit score requirements compared to conventional loans.
• Mortgage Insurance Requirement: Borrowers of FHA loans are required to pay for mortgage insurance, which protects the lender from a loss if the borrower defaults on the loan. This includes an upfront premium and an annual premium that varies based on loan terms, loan amount, and the initial loan-to-value ratio.
• Property and Borrower Eligibility: FHA loans have specific requirements for both the property and the borrower. The property must meet certain safety and livability standards, and the borrower must certain employment and US residency requirements.

Making the decision

When considering the size of your down payment, find out what the minimum is and decide if you're comfortable going higher. It's also important to think about your other expenses, such as closing costs, new furnishings and emergency funds. We recommend you have enough money for 3 to 6 months in a savings or similar account.

Things to consider about 20% down payments

If you make a 20% down payment, you might not need PMI through the life of the loan. Unless you have an FHA loan, the mortgage company should remove PMI once your home equity reaches 22%. But you can request to have it reviewed once you reach 20% equity and meet other requirements.

A larger down payment may also help you qualify for a lower interest rate. The less you borrow, the lower your monthly payments will be and the less interest you'll pay over the life of your mortgage.

But if coming up with 20% down means delaying your home purchase for another year, keep in mind that market conditions change and home prices and interest rates may vary. Consider contacting a loan officer to review your options and different scenarios so you feel confident about choosing the right loan product and down payment for your situation.

The USAA Advice Center provides general advice, tools and resources to guide your journey. Content may mention products, features or services that USAA Federal Savings Bank does not offer. The information contained is provided for informational purposes only and is not intended to represent any endorsement, expressed or implied, by USAA or any affiliates. All information provided is subject to change without notice.