Do you need 20% down to buy a home? I am still so surprised at how many conversations I have with renters that say they have not bought because they still need to save for the 20% needed. We as an industry (both lenders and Real Estate Agents) HAVE to get better at the education piece, that is what will keep the wolves at bay. (i.e. Zillow and the realtor.coms of the world)
For the average home in our area, 20% amounts to a big chunk. Now think about closing costs, moving decorating, setting up and you feel like you may need a mortgage to get a mortgage! But are families and single folks putting away money, not spending, not experiencing life so that they have 20%? Let’s educate on what that means. Both in today’s cost, say putting 3%, 5% or using some of the great 1st time homebuyer’s programs and putting zero down versus waiting 3, 5 or 10 years down the road. Yes, it is difficult to speculate and forecast, but we can use educated (conservative) assumptions.
The Math: $500,000 Home – 5% Down vs. 20% Down
| 5% Down Payment | 20% Down Payment | |
| Down Payment | $25,000 | $100,000 |
| Loan Amount | $475,000 | $400,000 |
| Mortgage Type | 30–year fixed–rate | 30–year fixed–rate |
| Interest Rate | 5.49% (APR 5.526) | 5.625% (APR 5.764) |
| Monthly Mortgage Payment (Principal and Interest) | $2,694.02 | $2,302.63 |
| PMI | $59.38* | 0 |
| Est Monthly tax escrow | $425 | $425 |
| Est Monthly home owners ins escrow | $100 | $100 |
| Total Monthly Payment | $3,278.40** | $2,877.63** |
| *This cost can be cancelled from your payment once you reach 20% equity in your home for conventional loans.**Does not include any HOA/Condo dues payments | ||
The 20% mindset is a byproduct of the combination of the mortgage meltdown and getting advice from cousins/neighbors/sisters-in-law’s neighbor’s husband’s friend. Which is why it is of paramount importance for us to educate folks correctly now. True story, more down payment means smaller payment, but there are many reasons why this isn’t always the best option.
Let’s take a quick look at options that don’t require 20% down:
1.) 3%, 5%, 10% and 15% down mortgages: We have great mortgages with folks putting as little as 3% down. We even offer lower mortgage rates or even NO mortgage payment at all. Some programs have income limits and 1st time buyer requirements but some don’t!
2.) 0% down mortgage: We have programs both for 1st time buyers and repeat buyers that will allow for no money down.
If you’d rather go the route of government-backed loans, these are your options:
1.) VA mortgage (must be a veteran to qualify): Can be lax as far as debt to income, doesn’t require mortgage insurance and will allow for all costs to come from a seller concession or gift funds.
2.) FHA mortgage: As little as 3.5% down and can all be from a gift or Down Payment Assistance program.
There are some further myths that FHA/VA loans are more difficult, take longer to close and are paperwork heavy to sellers. Not true at all. Maybe a little more of a look at the condition of the home, but there are very few issues for FHA/VA that will not be an issue for conventional as well.
3.) USDA home loan: Zero down and eligibility is location-based. Qualifying homes need to be in rural areas. If you have any questions if a home will qualify, let me know and I will look it up for you!
Don’t forget that you must qualify for each of these loans. Ability to replay and all of that… Additionally, putting less than 20% down usually means paying for private mortgage insurance. (PMI) However, we do have options to avoid this as well.
Why make a smaller down payment?
Are potential homebuyers considering waiting and saving until they have 20%? Consider how long it will take to save that much and how much you are spending in rent today. The avg rent in our area is near $3,000! Per the above example, that is right in line with buying a $500k home today. If you have 5% today and you want 20% and you put away $500 a month every month, it will take you almost 12 years to save. 12 years and $432,000 in rent assuming it never goes up! Assuming 2% appreciation, that is $120,000 in lost equity and no tax breaks; with the likelihood of rent increasing and a higher appreciation from today’s levels as well.
There are other benefits to putting down less:
- Buy now: Lock in the lower sales price knowing that you can refinance the pmt lower later.
- Conserve cash: More money available to invest, save and fund your nest egg.
- Pay off debt: You want the lowest rate and payment because you have other debt you want to get rid of, why not put less down and pay off that non-interest deductible debt?
- Improve your credit score: Once you’ve paid off debt, expect to see your score increase. You’ll get better rates on everything, not just a mortgage.
- Update: Buy a home that may need a little TLC and make it yours.
Cons of smaller down payments
Of course there are 2 sides to every coin:
- Mortgage insurance: A PMI payment is currently deducible, depending on your income, but that may change.
- Potentially higher mortgage rates: More risk as you have less “skin in the game” but we do have programs that in fact have LOWER rates with less than 20% down!
Bottom line is whether you are buying or renting, you are paying a mortgage and accumulating wealth, the question you need to ask yourself is do you want to accumulate wealth for your family or your landlords…?
Well, that’s it for today, have a super fantastic week and please let me know what you need and how I can help!
Scott
703.209.3138 cell