Does a Conventional Loan Actually Require 20% Down?

Leverage, reserves, and pricing vary by lender and program; the final terms follow the full file review.

The Quick Read: No. A conventional loan does not require 20% down; that number marks the point where mortgage insurance is no longer needed, not the minimum to qualify. On a one-unit primary residence, leverage can reach 97% (3% down) when at least one borrower is a first-time buyer, and 95% (5% down) otherwise. Put less than 20% down and the loan carries mortgage insurance, which can come off later. Terms vary by lender guidelines, property type, leverage, credit profile, and full file review.

What Does 20% Down Actually Control?

Exact terms depend on the lender’s guidelines, property type, leverage, and a full review of the borrower’s file.

It controls mortgage insurance, not eligibility. Under Fannie Mae’s Selling Guide, a conventional first mortgage with a loan-to-value ratio above 80% needs mortgage insurance or another approved form of credit enhancement. At 80% or below, it doesn’t.

So the rule reads like this. Qualifying for the loan is one test. Avoiding the insurance is a separate one. Most of the confusion comes from blending them.

Here is the plain math. Loan-to-value (LTV) is the loan amount divided by the home’s value. On a purchase, the lender uses the lower of the sales price or the appraised value. Pay more than the appraisal and you cover the gap in cash. Your down payment percentage gets measured against that lower number.

Where Did the 20% Rule Come From?

To get an agency guarantee, a borrower had to put down 20% or pay for mortgage insurance. People shortened that to “you need 20% down.” The federal consumer-finance regulator’s explanation of the origin says buyers can choose a down payment that fits their situation.

The habit stuck because it is easy to repeat. It was never the floor.

What Are the Real Minimums?

On purchases, the ceiling depends on occupancy, unit count and whether you are a first-time buyer. Across the wholesale programs Lendmire places files with, the picture looks like this:

The Fannie Mae Eligibility Matrix publishes these ceilings by occupancy and transaction. For the 97% option, “first-time buyer” means no ownership interest in a residence during the previous three years. Rental and investment purchases follow lower ceilings and tighter credit rules. Occupancy decides the leverage, and this article stays with homes you live in.

Credit matters too. The wholesale conventional programs start at a 620 decision score. An automated underwriting finding governs most files, with a total debt-to-income ceiling of 50%. Manually underwritten loans run tighter, at 36% or 45%, with extra score and reserve conditions. All of it is subject to lender guidelines and full file review.

Which Programs Allow 3% Down?

Every figure here varies by lender and program — guidelines, property type, leverage, and credit profile all apply.

HomeReady and Home Possible both limit borrower income to about 80% of the area median income.

The HomeReady matrix allows up to 97% LTV with cancellable mortgage insurance. It permits gifts, grants and Community Seconds (a subordinate loan from an approved source), and it allows combined leverage above 100% when an eligible Community Second is involved. Home Possible has a similar 3% structure. Final terms depend on lender guidelines, property type, leverage, and the borrower’s complete credit picture.

The common mistake is assuming 3% down is only for first-time buyers. Not always. The standard 97% option carries the first-time buyer condition. The income-limited programs work on a different test: income relative to the area. These specifics are subject to lender guidelines and a full review of property, leverage, and credit.

What Is Mortgage Insurance and What Drives the Cost?

Mortgage insurance protects the lender, not you. The CFPB’s PMI overview says so plainly. It gets added to the monthly payment and shows up on page 1 of the Loan Estimate and Closing Disclosure under Projected Payments.

What moves the cost:

• Down payment. More down, less insurance.
• Credit score. Stronger scores cost less.
• Loan term and product. Shorter fixed terms need less coverage than longer terms and adjustable loans.
• Coverage level. Required coverage steps up by LTV band, and lenders can sometimes choose reduced coverage at an added pricing adjustment.

Published typical annual premiums run from 0.58% to 1.86% of the loan balance. That is a range, never a quote. Your number depends on the file.

There is a second pricing layer. Loan-level price adjustments are risk-based charges tied to credit score, LTV, loan purpose, occupancy and product. Lower leverage and higher scores generally cost less.

What Does the Cost Picture Look Like at Different Down Payments?

Take one home at one price and walk four down payments through it. No dollars needed, just direction.

3% to 5% down. Largest loan, most coverage required, highest insurance cost. Cash stays in your account for repairs and reserves. Terms depend on the lender’s guidelines, the property type, the leverage, and a full review of the credit profile.

10% down. Smaller loan and a lower insurance tier. The CFPB’s guidance says 10% often saves money compared with the minimum.

15% down. Close to the line. Insurance is still required but sits in a lighter band, and it ends sooner because you start nearer 80%. The exact numbers vary by lender and program and follow a full review of property, leverage, and credit.

20% down. No mortgage insurance, the smallest loan, and generally the lowest total cost of borrowing. It also takes the most cash out of your reserves.

The tradeoff is liquidity. Money in the house is not available for emergencies. A buyer who empties savings to reach 20% can end up worse off than one who puts down 10% and keeps a cushion. Final terms depend on the lender’s guidelines, the property type, and the borrower’s complete credit picture.

Does Waiting to Save 20% Make Sense?

Sometimes. Sometimes not. Waiting means more months of rent, and the home you want may cost more by the time you get there. Paying insurance for a few years can cost less than that.

Picture a buyer with a stable job and a 5% down payment ready today. The alternative is waiting to build 20%. The insurance is temporary and removable. Rent is gone for good. If the buyer’s reserves would stay thin either way, though, waiting to build a stronger cushion may be the better call.

Neither answer is right for everyone. The question is whether your savings, job stability and target home line up today.

How Does Mortgage Insurance End?

Faster than most people expect. Under the Homeowners Protection Act, two thresholds apply, and the CFPB’s removal guidance lays them out:

1. Request at 80%. You can ask the servicer in writing to cancel when the balance is scheduled to reach 80% of the home’s original value. Extra payments can get you there sooner. Expect a good payment history, no subordinate liens and no decline in value.

2. Automatic at 78%. The servicer must terminate it when the balance is first scheduled to reach 78% of original value, as long as you are current.

The key word is original. The statutory dates run off the original value, not today’s market value. A servicer may allow earlier removal based on a new appraisal, but that is the servicer’s policy, not a federal right. Loans the agencies classify as high-risk fall outside the 80% and 78% rules, though they still get a final termination date.

FHA works differently. Its mortgage insurance has an upfront cost plus a monthly cost and is required on every FHA loan.

Can You Avoid Mortgage Insurance With Less Than 20% Down?

In some cases, yes, with a tradeoff. Some low-down-payment loans avoid monthly insurance by charging a higher interest rate instead. Which one costs less depends on how long you keep the loan. Stay a long time and the rate-based approach can cost more. Move or refinance in a few years and it can cost less.

Gifts and down payment assistance can also help you reach a stronger LTV. Programs like HomeReady accept gifts and grants under defined rules. Lenders document the source of funds, so get gift letters and bank records lined up early.

What Cash Do You Need Beyond the Down Payment?

More than most buyers budget. The CFPB’s down payment guidance says to plan for closing costs, points, moving and immediate repairs on top of the down payment. “3% down” is not “3% to close.”

Reserves matter as well. Manually underwritten files carry reserve factors from the Eligibility Matrix, and thin reserves can limit the options on an otherwise clean file.

One check worth running on your Loan Estimate: the loan amount plus your down payment should equal the sale price. If it doesn’t, ask why before moving on.

When Does 20% Down Make Sense?

When you can reach it without draining your safety net. Putting 20% down removes mortgage insurance, shrinks the loan and generally means better pricing and a stronger chance of approval. It also builds equity from day one.

It makes less sense if reaching it means skipping an emergency fund, carrying high-interest debt or passing on a home you can afford today. Go with the number that fits your cash, not the one in the old rule.

How Do You Pick Your Number?

Work through these in order:

1. Set your monthly budget with insurance included, not as an afterthought. A lower down payment may mean a lower target price.

2. List your cash: down payment, closing costs, reserves and moving.

3. Check your first-time buyer status and whether income limits for HomeReady or Home Possible apply.

4. Compare at least three down payment levels on the same home.

5. Ask how long you plan to keep the loan, since that affects the insurance and rate tradeoff.

Conventional vs. FHA, VA and USDA

If 20% isn’t an option, conventional loans with insurance aren’t the only path. Lenders usually require PMI or steer you to an FHA, VA or USDA loan. Neither is automatically cheaper. Credit score, down payment and the lender all change the result. Conventional insurance is generally cheaper than FHA for borrowers with good credit, and it can come off later.

If you are buying a home and want to see whether conventional loan programs fit your file, Lendmire can help you compare the options and what each one asks of the file.

Key Terms Defined

Loan-to-value (LTV): the loan amount divided by the home’s value.

Private mortgage insurance (PMI): coverage on a conventional loan that protects the lender when your down payment is under 20%.

Loan-level price adjustment: a risk-based pricing charge tied to credit score, LTV, loan purpose and occupancy.

Area median income (AMI): the income benchmark used to set eligibility for HomeReady and Home Possible.

Community Second: a subordinate loan from an approved source that can help with down payment and closing costs.

For your own numbers, request a scenario review with Lendmire.

About Lendmire

Lendmire is a mortgage brokerage (NMLS# 2371349) licensed for consumer mortgage lending in 16 states, arranging FHA, VA, conventional and jumbo purchase and refinance loans through a wholesale lending network. Eligibility is determined by the lender on each file. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.

References

1. Fannie Mae Selling Guide B7-1-01, Provision of Mortgage Insurance

2. CFPB: How to decide how much to spend on your down payment

3. Fannie Mae Eligibility Matrix

4. Fannie Mae HomeReady Product Matrix

5. CFPB: What is private mortgage insurance?

6. CFPB: When can I remove PMI from my loan?

7. CFPB: What kind of down payment do I need?