Coming up with enough cash for a down payment to buy a house is the BIGGEST roadblock for most prospective home buyers and one of the most asked questions I get. So how much do you really need? Let’s discuss.
There’s a common misconception that, as a homebuyer, you need to come up with 20% of the total sale price for your down payment. This use to be fact and most people go by the 20% rule before contacting a professional. In fact, a recent survey (Lending Tree) asked what is keeping consumers from purchasing a home.
For over half of those surveyed, the ability to afford a down payment is the biggest hurdle.
First, What is a Down Payment?
A down payment is the cash you pay upfront to make a large purchase, such as a car or a home, and is expressed as a percentage of the price. A 10% down payment on a $350,000 home would be $35,000.
Lenders require a down payment for most mortgages. However, there are exceptions, such as with VA loans and USDA loans, which are backed by the federal government, and usually do not require down payments.
Putting at least 20% down on a home will increase your chances of getting approved for a mortgage at a decent rate, and will allow you to avoid mortgage insurance. But you can put down less than 20%. The minimum down payment required for a house varies depending on the type of mortgage
Most individuals assume a 20% down payment is necessary. While putting more money down if you’re able can benefit buyers, putting 20% down is not mandatory. As Freddie Mac puts it:
“The most damaging down payment myth—since it stops the homebuying process before it can start—is the belief that 20% is necessary.”
If saving that much money sounds overwhelming, you might be ready to give up on the dream of homeownership before you even begin – but you don’t have to. According to the National Association of Realtors (NAR), the median down payment hasn’t been over 20% since 2005.
It may sound surprising, but today’s average down payment is only 12%.
That number is even lower for first-time homebuyers, whose average down payment is only 7%. The only groups who put 20% or more down on average are older homebuyers who likely can use the sale of an existing home to fuel a larger down payment on their next home.
Should I still try and do 20%?
Look at it this way: You have a pretty significant personal financial stake in the property if you put down 20% or even more. That makes it less likely that you’ll default and risk foreclosure. That 20% is your money, and you don’t want to lose it.
Lenders want some assurance if you put down less—not necessarily that you won’t default but that they’ll still get paid if you do. A PMI policy effectively ensures the bank. It will get paid in a worst-case scenario. Message me if you want to learn more about that.
So, what does this mean for you?
If you’re a prospective homebuyer, it’s important to know you don’t have to put the full 20% down. And while saving for any down payment amount may feel like a challenge, keep in mind there are programs for qualified buyers that allow them to purchase a home with a down payment as low as 3.5%. There are also options like VA loans and USDA loans with no down payment requirements for qualified applicants.
“How much home can I afford?”
The answer to the question “How much home can I afford?” is a personal one and should not be left solely to your mortgage lender.
The best way to determine how much house you can afford is to start with your monthly budget and decide what you can comfortably pay for a home each month.
To understand your options, you do need to do your homework. If you’re interested in learning more about down payment assistance programs, information is available through sites like downpaymentresource.com. Be sure to also work with a real estate advisor from the start to learn what you may qualify for in the homebuying process.