Is 20% Outdated Advice? Here’s What You Need to Know
According to Zillow, the median home sales price is $238,700 — which means a traditional down payment of 20% would be nearly $50,000. But if that size down payment is overwhelming, don’t feel discouraged. More and more mortgage programs allow borrowers to qualify with less than 20% to put down.
In fact, that well-known percentage is really just a myth.
Depending on the type of home loan, your credit history and personal financial situation, you may be eligible to put as little as 3% down, or even less for VA and USDA mortgages that require zero down1. According to the National Association of Realtors, the average down payment for first-time home buyers in 2016 was 6%, and just 14% for repeat buyers.
In addition to a lower upfront cash investment, here are other benefits of putting less than 20 percent down.
Preserve your investments and retirement. It may be tempting to dip into your 401k for a down payment, but that’s not generally recommended advice. In some cases, while mortgage rates remain low, it may make more sense to put less down on your home and preserve your retirement funds or put the difference in a high-yield investment. Check with your financial advisor or tax accountant to understand the fill impact2.
Keep cash on hand. A smaller down payment means you’ll have access to more cash in case of a change in your financial situation, such as a job loss or unexpected medical expenses. That extra cash can also come in handy should your new home need any repairs or improvements.
Buy now, save more. Buying now, even with a lower down payment could end up saving you, too. Home prices continue to rise at a rate of about five percent per year. Waiting to buy until you have 20 percent saved up could mean you end up paying more for your home in the long run.
Make progress toward other financial goals. Putting less down on your home purchase frees up more cash to chip away at student loans, credit card debt and other long-term financial goals.
Of course, there are still some advantages to making a higher down payment. If you can come up with a down payment of 10%, you’ll have more options, even with a lower credit score. For example, you may qualify for an FHA loan with a FICO score as low as 520 if you can swing a 10% down payment1. A higher down payment also typically means better interest rates and you’ll have more equity in the home.
So what is the advantage to putting down 20%? One obvious benefit is avoiding PMI (private mortgage insurance). A down payment of less than 20 percent will require you to purchase PMI, which can cost anywhere from .5 to 1% of your total loan amount, potentially hundreds of dollars to your monthly payments. The good news is that once you’ve built up 20% equity, you’ll be eligible to drop the PMI. For some buyers, the higher monthly payment is easier to swallow than making a higher down payment. Your home loan expert at PrimeLending can help you run the numbers and decide which scenario makes sense for you.
So how do you know what the right down payment is for you? There are a few factors to consider.
1.How soon are you planning to purchase a home? If you need to move sooner rather than later and simply don’t have time to save, talk to your mortgage lender about your options for a low down payment loan, such as an FHA or USDA loan.
2.Consider how much you have saved and how much you can really afford to put down. Use a mortgage calculator to compare monthly payments with varying down payments and loan terms to find the number that works best for you.
3.Contact a PrimeLending mortgage expert to help you assess all your options. They can help you prequalified3 and find out what loan programs – and down payment scenarios –you qualify for. Our loan expert will review your income, credit and other factors to determine your eligibility for different mortgage programs.
1Additional restrictions may apply. Contact your PrimeLending loan officer for more details.
2PrimeLending is not authorized to give tax advice. Please consult your tax adviser for tax advice for your specific situation.
3A prequalification is not an approval of credit, and does not signify that underwriting requirements have been met.