Real Estate Myths Debunked: Do I Need A 20% Down Payment?

November 28th. 2017

This is Part 1 in our series: “Real Estate Myths Debunked”. 

 

One of the biggest hurdles for home buyers is securing a down payment on their mortgage. This is especially true for first time buyers who do not have equity from a previous home sale.

 

Down payment gives incentive for the borrower to make mortgage payments. If you fail to make payments and the home falls into foreclosure, you forfeit that amount paid down.

 

Often, people mistakenly believe that they must put down 20% of their home’s price as a down payment on their home. While it is always good to pay off debts faster, this is not usually a requirement.

 

So, how much should you save for a down payment? First, let’s break down the origins of the 20% myth.

 

Why 20%?

 

For those who can afford the sizeable 20% down payment, this is often a wise choice. A down payment of less than 20% requires a buyer to obtain mortgage insurance. As a buyer, you are seen as lower risk when you can put down a large sum of cash for the down payment. In this case, the added expense of mortgage insurance is not needed.

 

Additionally, the higher down payment means a smaller loan is needed to pay off the home in full. A smaller loan means less interest paid in the long run. This saves thousands on the total amount paid for the home, sometimes tens of thousands or more.

 

The Lowdown on Lower Down Payments

 

So what is the minimum? Generally mortgage lenders will ask for at least a 3% down payment on the home.  To obtain an FHA loan through the government, a 3.5% down payment is required. This is a very popular loan and a great option for many people.

 

However, the minimum required depends on several factors. Your credit score, reason for buying, and type of property all factor in to your minimum down payment.

 

If you are not using an FHA loan, the other option is PMI (Private Mortgage Insurance). Regardless of the loan type, your monthly mortgage insurance payment will be higher if you make a small down payment.

 

Other Finances To Consider

 

Occasionally, homes require an all-cash sale with no financing (this will be covered in later section). The only residual fees would be taxes, homeowner’s insurance and possibly HOA fees as there is no mortgage.

 

Often, lenders will charge additional fees for those making a down payment less than 20%. These fees may be added during the closing or built into the mortgage interest.

 

by Hannah Jay

 

Could you afford a 20% down payment in your area?


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