The 20% Down Myth, And How You Can Now Buy A Home With Much Less

One of the biggest misconceptions about buying a house today is that you need to make a 20% down payment.

And let’s face it. That’s holding back a lot of potential homeowners, especially first-time buyers, who just don’t have that much cash in the bank.

But the facts are that while a 20% down payment is nice, you can still buy a home without it. Here’s the scoop:

A 20% down payment is always nice to have

Putting 20% down is still the gold standard of home buying. If you can make a hefty down payment, you won’t need to pay for costly private mortgage insurance (PMI) and can qualify for a lower mortgage rate. Plus, it gives you instant equity in your home, and provides a safe cushion if home values sink (think 2008).

Buy you can still swing a home purchase with much less down

Potential home buyers will be relieved to hear that several types of home loans with lower down payments are now available.

FHA mortgages (mortgages issued by federally qualified lenders and insured by the Federal Housing Administration, or FHA) may let you put down as little as 3.5%.

“A veteran can get 100% financing and put as little as 0% down,” adds Allen Robinson, founder and president of  First Trust Mortgage Corporation in Florida.

Some lending companies are offering loans for as little as 1% down to consumers with solid credit profiles, for example, who have FICO scores of 680 or higher, says Erin Lantz, Vice President of Mortgages with Zillow Group, in an interview with Kiplinger.

Less than 20% down? Don’t be put off

If you’re ready to settle down and are tired of throwing rent money out the window, don’t give up on your home-buying dreams.

Just remember some common sense rules.

  • Save as much as you can, because moving, closing costs, and personalizing a new home still cost beaucoup bucks, above and beyond the down payment.
  • Before buying, clean up your credit and make sure your score is as high as possible to qualify for the best mortgage rates.
  • Use an experienced realtor and mortgage expert to guide you, especially if you are a first-time buyer. They can save you money in the long run and steer you away from expensive mistakes.
  • Don’t “over buy” – or bite off more than you can chew – in the housing market. Saddling yourself with a “too big” payment is a recipe for disaster whatever the size of your down payment. We’ve had young (and older!) clients make the mistake of buying “too much house.” The only way to fix that after the fact is to get roommates to help pay the bill or put the house back on the market, a costly reversal.
  • Take a hard look at your monthly cash flow before buying, and factor in potential mortgage payments, real estate taxes, insurance, monthly homeowner’s association or condo maintenance, and periodic repairs averaging 1-2% of home value each year (after all, things do break). And don’t forget — you still need money to live!

The key thing to remember? If you do your homework right, buying a home can be a hugely rewarding personal and financial move, and you can look forward to making many happy memories in your new space!

Thinking of buying or refinancing a home?  Check out our previous article on how the right mortgage expert can make, or break, your home financing deal.

About Mari Adam

Mari Adam, Certified Financial Planner™ and President of Adam Financial Associates Inc, has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

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