If you don’t have the money to put 20 percent down, forget about buying a house.
You’ve heard this plenty of times. Maybe even from your parents. With this hot market we’re still in, it’s a confusing time for buyers. It’s left buyers asking, “Do I really need to put 20 percent down on a home to buy?”
As an agent, I can’t tell you how often I’ve had this conversation with buyers. Having enough money to put 20 percent down seems like an unreachable amount for some. There are always pros and cons when it comes to the amount you can put down on a home. It depends on a few factors, such as financial and personal.
I don’t know about you, but 20 percent in Kitsap County’s housing market is a big chunk of change for most people. Myself included.
Apartment List’s 2022 Millennial Homeownership Report found that 66% of millennials don’t have savings for a down payment. In most cases, they would need to borrow money from their parents or continue saving. Or they might end up moving to a more affordable housing market.
We all know the housing market’s hot, and experts agree if you’re able to buy now, do it. But what about that large down payment? If you don’t have it, is it better to wait to buy a home until you do have it?
The truth is you are able to buy a home without putting 20 percent down. Many people don’t have that kind of money and are still able to buy a home.
If you’re a renter, it might be financially smarter to put down less and pay a higher interest rate and monthly mortgage amount. While it might be more money than the rent you pay, at least you’re building equity in your home rather than paying rent somewhere else and wasting that money each month.
So while it’s possible to buy a home without a large down payment, the question then becomes what are the benefits of saving up and having a larger down payment?
Before we unpack the pros of a huge down payment, let’s discuss where this 20 percent down came from and what it exactly it means.
Why is a 20 percent down payment needed to buy a house?
Mortgage lenders want you to put down 20 percent because it decreases their lending risk. It actually has nothing to do with you being able to buy a home. And to be clear, it’s only when you have a conventional loan that a 20 percent down payment is needed. So if you have a VA loan, you won’t need a down payment.
But even this requirement by the mortgage lenders isn’t totally true. There’s no hard and fast rule by lenders that you put down 20 percent to buy a house.
In fact, the average first-time home buyer puts down only six percent. There are lots of down payment options for a buyer who can’t get the full 20 percent down. These loan programs vary from 0 to 10 percent, which is a pretty big difference from the 20 percent we’re so used to hearing.
There’s a catch to a smaller down payment. If you take out a conventional loan and can only put down five percent, your lender will require you to get private mortgage insurance (PMI).
What is private mortgage insurance and how much does it cost?
PMI is an extra insurance policy that protects the lender if for any reason you don’t pay your mortgage. It’s the lender’s safety net on the money they’re letting you borrow. Anyone with a down payment of less than 20 percent will need PMI.
PMI’s based on a few things. These include your credit score and the insurer. Another factor is how much you owe on your mortgage versus the home’s actual market value.
While I can’t give you an exact amount, it’s typical to pay between $30-$150 each month for every $100,000 you borrow. That might not seem like a lot today, but over a 30-year mortgage, that amount can add up fast.
Is 20 percent required for a down payment? No. It’s not. Is 20 percent still worth saving for before you buy a home? Yes. Turns out, your parents were right about this one, and here’s why.
5 reasons you should save for that 20 percent down payment before buying a home
1. You can get approved easier
The first step in the home buying process is getting approved if you’re taking out a loan. It’s the same as when you go to a job interview and bring your resume highlighting your strengths and experience. This 20 percent down payment is your resume for the lenders.
Lenders want to see that you can save and that you’re responsible with your money. They want you to have a little “skin in the game” so to speak. Your down payment confirms you have this.
The quicker you can get approved, the quicker you can start looking for that dream home. And as soon as you find your dream home, you can put in a solid offer.
2. Makes your offer more attractive
Speaking of getting your dream home-it can’t happen unless your offer’s accepted by the sellers. This is still a hot market, and you as a buyer need to position yourself as a serious contender.
One of the best ways to make your offer outshine the others is with a large down payment.
A large down payment tells sellers you most likely took out a loan and the deal will close. Yes, price is important to a seller, but if the deal can’t close because a buyer can’t secure funding, then the offer is pointless.
Make your offer clean and put the seller’s mind at ease by assuring them your funding’s secure. The best way to do this is with a hefty down payment.
3. It lowers your debt-to-income ratio
When you put a larger down payment upfront, you don’t have to take on as much debt. With less debt to your name, it increases your ability to get the mortgage you want. Most lenders don’t approve mortgages where your debt-to-income ratio is higher than 43%.
A lower debt-to-income ratio can help get you a better interest rate. Lenders see you as being less risky when you put more money down and usually offer a lower interest rate.
Having a lower interest rate can save you a lot of money over the term of the loan. Not to mention the fact you won’t need to pay the PMI each month, which means even more savings.
4. You can pay down your mortgage faster
Having a larger down payment gives you freedom later on. Remember, that down payment means smaller monthly mortgage payments.
Imagine all you can do with that monthly mortgage payment once you no longer have to pay it. You can finally open that small business you’ve been dreaming about. Or you can pay for your children’s education or even buy a vacation home and start paying that down.
Another benefit of putting a larger down payment is your monthly payments are less.
With smaller monthly payments, you can make extra payments on your principal each month which cuts down the length of your mortgage. It’s possible to start saving early for retirement by planning ahead with a large down payment.
5. Protect yourself from the market changes
It’s hard to ever predict what the market will do in the future, but one way you can protect your investment is by paying a larger down payment. When you put more down at the beginning, you have a greater percentage of your home paid off. The part of the mortgage you’ve paid off is the equity you’ve earned in your home.
When you have more equity in your home, you have more flexibility and opportunities.
You can sell your home if something unexpected happens and you need to relocate. When you have a smaller loan to pay down, you can make decisions that aren’t based on finances alone.
It’s important to have all the information when you are preparing to buy a home, especially if it’s your first home. Get to know all your options before you begin this process.
My name is Wendy Bathgate and I’m a real estate agent in Kitsap County, WA. I would love to meet with you and discuss your options in regards to buying a home. I can get you in touch with loan officers who can help you decide what is best for you.
Get in touch with me today. You might be closer to homeownership than you ever imagined.
Let’s connect and discuss your options.