While a lower down payment can make homeownership more accessible, keep in mind that if you put down less than 20 percent on a conventional loan, you’ll be required to pay for private mortgage insurance (PMI), which protects the lender if you were to stop making payments. A lower down payment typically also means you won’t qualify for the lowest possible mortgage rate.

First-time homebuyer down payment assistance programs

Many states and local municipalities offer down payment assistance programs for first-time homebuyers, such as:

• Grants: A grant is essentially a gift that can help cover your down payment and closing costs. You never have to pay it back.
• Forgivable loans: A forgivable loan is a type of second mortgage for a specific number of years, typically with a zero percent interest rate. As its name suggests, you don’t have to repay this loan unless you move, sell or refinance before a certain time frame.
• Deferred payment loans: Like forgivable loans, a deferred payment loan is a second mortgage with a zero percent or low interest rate that you can use for a down payment. However, you’ll be required to repay the loan when you move, sell or refinance.

To find out if you’re eligible for down payment assistance, ask your mortgage lender which programs they accept and whether you qualify.

Benefits of a smaller down payment

• Begin building equity sooner: You can move into a home and begin building equity sooner than if you waited to save for a bigger down payment.
• Move in on your timeline: Saving for a large down payment takes time. A lower down payment can allow you to buy a home when you need to.
• Keep more money in your pocket: Moving house comes with costs like repairs, upgrades and furniture. With a lower down payment, you can keep more of your money to cover these expenses.
• Get into a home before prices rise further: It could take years to save a 20 percent down payment, and all the while, home prices and interest rates could go up.
• Maintain an emergency fund: You don’t want to drain your savings to make a large down payment. With a smaller amount down, you’ll ideally retain enough to pad your emergency fund for unexpected costs.

Other homebuying costs to consider

While a down payment is typically the largest out-of-pocket expense for first-time homebuyers, it’s not the only one. You’ll also need to cover the closing costs of the mortgage — all the expenses needed to process your loan, like the origination, appraisal and title fees. Closing costs range from 2 percent to 5 percent of a home’s purchase price.

Another cost you might need to account for: cash reserves. Not every borrower needs to have reserves, especially if you have a strong mortgage application otherwise, but it’s still wise to have the savings stashed away if you were to find yourself unable to pay your mortgage. If your lender does require reserves, you could need anywhere from one month to six months’ worth of mortgage payments in the bank.

Bottom line

While putting 20 percent down to purchase your first home has its benefits, it’s not a rule. Depending on the loan type, your credit and other factors, you might qualify for a down payment as low as 3 percent, or be able to avoid a down payment altogether. You might also be eligible for down payment assistance. Overall, your down payment amount should help you achieve your homeownership dreams while also allowing you the flexibility to work on other financial goals, such as adding to an emergency fund or paying off debt.