Do you need a 20% down payment in order to buy a house? Simply put, the answer is No.
The “20% down payment myth” has stopped many aspiring home buyers from purchasing a home.
This mindset comes from generations ago.
Several people that regard themselves as financial experts and professionals: parents, college professors, and even real estate professionals have always pitched 20% down as a wise move, but, is this truly the case?
Here is an excerpt from the National Association of Realtors®:
"Apparent confusion about down payment requirements may also be behind non-owners' lagging confidence about buying. NAR's Profile of Home Buyers and Sellers has shown that the median down payment for first-time buyers has been 6% for 3 straight years and 14% for repeat buyers in 3 of the past 4 years, however, when asked about the amount of down payment needed to purchase a home, a remarkable 87% of non-owners indicated that a down payment of 10% or more is necessary."
What Will it Take to Disregard the Mythical 20% Figure?
If you’re reading this (and willing to read until the end), you will have proven that you are ready for a greater insight into home buying wisdom.
Can I Really Buy a House Without 20% Down?
Yes, in fact, the massive upfront cost is not the "norm" so to speak. As mentioned above, and, according to the National Association of Realtors®, the average down payment for first time home buyers is just 6%.
The “20% Down Payment Myth” continues to propagate as a result of confusion between this and the fact you are required to have a 20% down payment, on a Conventional loan, to avoid paying private mortgage insurance.
Check this out, since the advent of FHA loans in 1934, the 20% down payment requirement has been gone, this was more than 80 years ago!
The Following are Ways in Which you Can Buy a Home with Minimal Down Payment:
The FHA mortgage requires just 3.5% down, however, most first-time buyers are unaware that the down payment can be sourced from a financial gift or approved down payment assistance program.
VA mortgages require zero down, and, another added benefit, do not require monthly mortgage insurance. This helps our nation's heroes to buy more house for less money. 100% of the closing costs can come from a seller concession or via gift funds from family. Those with current and former military service are likely eligible.
Conventional Loans Offer Down Payments as Low as 3%.
HomeReady™: allows non-borrowing household members to contribute toward qualifying income. Buyers can also use roommate income and/or mother-in-law unit, rental income, to qualify.
Home Possible® Advantage: a Freddie Mac 3% down loan offering reduced mortgage insurance
Conventional 97: Fannie Mae’s low down payment loan, with no income limits and no first-time buyer requirement.
USDA Home Loans: offers a zero down payment requirement. Property eligibility is location-based and homes outside of major metros are likely eligible. USDA loans are backed by the United States Department of Agriculture. Keep in mind, these loans are not for farms, but for typical single-family homes that happen to be in less-dense areas. USDA loans are available in every state.
1st/2nd or Piggyback Loans: require 10% percent down. Typically, we will originate an 80% first mortgage, followed by a 9.99% second mortgage, or home equity line of credit, and the buyer puts the remaining 10% down. This eliminates the need for private mortgage insurance. This loan scenario is available for buyers with great credit.
Down Payment Assistance (DPA) Programs
Down payment assistance programs are becoming increasingly popular. Government-run programs, plus approved non-profits, offer down payment assistance to support home ownership in select communities.
Nearly 90% of all single-family homes in the U.S. are eligible for some kind of down payment assistance according to a study by RealtyTrac. All of the major loan types mentioned above allow the borrower to apply DPA funds toward the required down payment.
Read more about the Metro Mortgage Assistance Plus grant that provides 4% of the loan amount to be applied towards down payment, and in some cases, closings costs, and best of all, does not have to be paid back!
What About Closing Costs?
Keep in mind, you will pay closing costs even if you select a loan program with no, or low down payment requirement.
Closing costs, on average, can range from 1%-3% of the home’s purchase price depending on many factors, such as, credit score, title fees, property taxes, escrow fees, etc.
The Following are Ways to Help Pay for Closing Costs:
Lender Credits Help With Closing Costs
Buyers can request a lender credit in return for a slightly higher mortgage interest rate. The credit helps pay costs and can also be applied to other fees.
Seller Concessions Reduce or Eliminate Closing Costs
The seller can agree to concessions, or a closing cost credit, to pay for all or part of the buyer’s closing costs. Seller concessions are more available in markets that favor the buyer, and this is not so much the case in Colorado.
4 Reasons It May Be Better Not To Put 20% Down
More Cash Available - it’s always a good idea to have cash on hand in case of an unforeseen event requiring emergency funds. Those who put all of their liquid assets into a down payment may not have the resources to weather a potential storm.
Buy Sooner - home prices, on average across the country, are rising at about 5% - 6% per year. That equates to $10,000.00 annually on a home costing $200,000.00. Waiting to save for a down payment could leave you chasing higher home prices.
Invest Elsewhere - you could deplete your 401k for a down payment, provided it’s allowed, however, you are probably better leaving retirement funds intact, not paying early withdrawal penalties, and continuing to invest. Removing funds for a down payment severely limits compound interest you could have potentially earned. This could be a decision you may end up regretting.
3 Drawbacks of Making a Small Down Payment
Mortgage Insurance - yes, it’s an extra cost.
Higher Mortgage Rates, Maybe - making a small down payment typically increases your rate for conventional loans, however, low down payment, government-backed loans like FHA, VA, and USDA all come with lower rates, when comparing against a conventional mortgage with 20% down.
Less Equity - you will have less equity in the home if you make a small down payment.
How Do I Check My Low Down Payment Eligibility?
Call me today, 303-668-3350. I can be reached any time and will verify your eligibility after I review your completed loan application.
You can get a jump start on the process by clicking here for a link to my secure, online loan application.
In closing, it's a terrific time to be a home buyer. Property values are rising in many U.S. markets, and especially in Colorado! Mortgage rates remain low, and, there is an abundance of low-down-payment mortgages available for today's home buyers.
Call me now, 303.668.3350 or click here to apply! I would love the opportunity to work for you.
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Nations Reliable Lending, LLC
Colorado's Mortgage Expert
NMLS: 253799 / NRL NMLS: 181407
Regulated by the Division of Real Estate
The information contained in this blog is for informational purposes only and is not an advertisement for loan products. The views and opinions expressed herein are those of the author and do not reflect the policy of any entity other than the author.
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