Is a 20 Percent Down Payment Necessary?
The belief that a 20 percent down payment is necessary is strong. Real Simple reports that a survey from the National Association of Realtors found that some 35 percent of Americans believed they would need to put down between 16 and 20 percent to secure their new home. Another 10 percent thought that they’d have to put down more than 20 percent if they wanted to become homeowners. While putting down a sizeable down payment is an option, it isn’t a necessity. You can buy a home with a smaller down payment.
Understanding the 20 Percent Down Payment Myth
Why is the 20 percent down payment myth so persistent? As Business Insider explains, the 20 percent threshold comes from the number needed to avoid paying for private mortgage insurance (PMI) for a conventional loan. Buyers who put down less than 20 percent have to purchase this insurance, and it’s an additional expense that many are eager to avoid. However, some people may find paying PMI a fair trade-off when weighed against the value of building equity as a homeowner. Others may choose to avoid both the 20 percent down payment and PMI by opting for a different form of financing when they purchase a home.
Making a hefty down payment does have its advantages. As NerdWallet points out, you’ll be in a strong financial position, which assures sellers and lenders that you’re on solid financial ground. Sellers will feel confident that you’ll be able to get the financing you need to make your purchase. Meanwhile, lenders will be more interested in competing for your business. You’ll likely qualify for a lower interest rate, and you’ll enjoy a lower monthly payment. These numerous advantages may be why many realtors are reporting seeing many buyers who are prepared to make larger down payments to have a competitive edge in the current sizzling real estate market.
Exploring Your Options for Other Down Payments
What if you don’t have the cash to put 20 percent down, or you wish to use your resources for other purposes? As The Mortgage Reports explains, you have other options for down payments:
- VA loans: Backed by the U.S. Department of Veterans Affairs (VA), these federally-insured loans allow eligible borrowers to purchase homes with no down payment needed. VA loans are for military personnel, veterans, surviving spouses, and others who meet similar service requirements.
- USDA loans: Government-backed loans offered by the U.S. Department of Agriculture (USDA) also provide 100 percent financing. They’re available to anyone who can meet income, geographic, and other requirements.
- FHA loans: Another government-backed loan, an FHA loan allows a qualifying borrower to buy a home with as little as 3.5 percent down. These loans are guaranteed by the Federal Housing Administration (FHA) and are popular with both first-time homebuyers and those with less-than-perfect credit.
- Conventional loans: A conventional loan is a home loan that isn’t backed by the government. They can be a fantastic choice for a homebuyer with strong credit.
Is a 20 percent down payment necessary? According to HomeLight, the median down payment for first-time buyers is just 7 percent. It’s 12 percent for all buyers and 17 percent for repeat buyers. While a respectable down payment can help you make a persuasive case, you clearly don’t need to wait until you have 20 percent saved to make your move. If you’re ready to explore your path to reach your housing goals, talk to the home loan experts at PrimeLending Dallas today.