Your Down Payment Guide
There is a common misconception with new buyers when it comes to how much money they need for their down payment. Sometime long ago a myth was started, for whatever reason, that all buyers would need to put down at least 20% to buy a home. This seems like a farfetched amount to reach for many people with other bills to pay. However, there is some good news for potential buyers.
The days of needing a 20% down payment to buy a home are far over. In fact, there is even programs available nowadays that can help buyers come up with the needed funds for their down payment. While these are not always recommended, they are always an option for those who need that little bit of extra help to get their down payment. But the main question this article is going to answer is: How much down is enough for your down payment?
Down Payment Myths
With a record number of new homebuyers last year, many people realized that their homeownership dream could become a reality. And the best part is is that no where near all of these buyers put down 20%. In fact, we have personally helped clients with loan types that require 0% down in order to buy their home. While you will be stuck paying PMI (private mortgage insurance), there is a possibility of owning a home without saving up tens-of-thousands of dollars. Many buyers have still been overwhelmed by the myth of “20% down or do not even try.” One of the most detrimental myths of all-time in the real estate world is that of the 20% down payment. In fact, even Freddie Mac says:
“The most damaging down payment myth—since it stops the homebuying process before it can start—is the belief that 20% is necessary.”
There are very few lenders or loans that actually require the 20% down payment up front. In reality, unless specified by a certain lender or loan type, there are very few buyers that actually put down that amount. So, first-time homebuyers can breathe a sigh of relief after hearing that news. With that being said, it is not always a bad thing to put down that amount, as you will get a favorable rate from your lender in most cases. Not only will you have a more favorable rate, but you will also forgo the need to pay PMI. One of the hidden costs of homeownership is PMI, and many buyers do not even know what private mortgage insurance is. PMI is an extra payment a mortgagee pays to protect the bank in case of default.
Down Payment Statistics
From the Profile Of Home Buyers and Sellers, ran by NAR (National Association of Realtors), the median down payment when purchasing a home has declined. In fact, the median down payment has not been over 20% since 2005. That is nearly two-decades of misconceptions. The percent down by homebuyers in 2021 was around 13. This may surprise many of you, but that is according to immense amounts of data that is collected every year. Some more good news is that first-time homebuyers have to put even less down. The average percent down payment for first-time homebuyers was as low as 7% in recent years. This is largely because of the incentives given to millennials and first-time homebuyers in order to drive demand.
Maybe You Should Put Down 20%
Do not forget the benefits of a 20% down payment, however. It is smart to put some of your own in the game when it comes to your home loan. Having some of your own collateral helps show that you are a serious buyer. More often than not, having some of your own money backing the loan will actually allow you to have more favorable loan parameters from your lender. The best thing to take away from this, however, is that your homeownership journey is closer than it seems.
Maybe You Should NOT Put Down 20%
If you are a homebuyer that may be interested in a home and can’t save up thousands for a down payment, you are in luck. There is plenty of information from websites like Investopedia that outline the various loan types and their down payments. But when in doubt, always reach out to your real estate professionals to learn more about different loan types. There are programs available for buyers with down payments as low as 3.5%. Not only are there loans with down payments as low as mortgage rates, but there is also loans available with 0% down. For those using a VA or USDA loan, there is a whopping. . . 0% down required.