Which type of loan requires a down payment of at least 20% to avoid private mortgage insurance (PMI)?

A conventional loan typically requires a down payment of at least 20% to avoid private mortgage insurance (PMI). PMI is an insurance policy that protects the lender if the borrower defaults on the loan, and it is often applicable when the down payment is less than 20% of the home’s purchase price. This requirement is rooted in lender risk assessment practices, as lower down payments can increase the risk of default. By putting down 20% or more, borrowers can demonstrate greater equity in the property right from the outset, reducing the lender’s risk.

In contrast, FHA loans, which are backed by the Federal Housing Administration, require mortgage insurance independent of the down payment amount—PMI is included regardless of how much is initially paid down. VA loans, available to eligible veterans, typically do not require any down payment or PMI at all, making them an attractive option. USDA loans, designed for rural homebuyers, may also not require a down payment and do not necessarily impose PMI if certain conditions are met. Thus, the 20% down payment requirement specifically applies to conventional loans to avoid PMI.