Do you need a 20% discount to buy a home?
According to mortgage advisor Ivan Simmental, this is one of the most common questions first time home buyers ask.
“Twenty percent is a huge down payment and can feel unrealistic and daunting at times,” Simental said on a recent episode of The Mortgage Reports Podcast. “If you’re trying to save a 20% down payment, it can be a little scary at times.”
Fortunately, 20% down is not always necessary. Many homebuyers today can qualify with just 5, 3, or even 0% less.
Simental says it’s important to weigh the pros and cons of a large down payment before risking anything. You should consider this before buying.
Hear Ivan on The Mortgage Reports Podcast!
Is It Best To Lower 20%?
The correct deposit size is personal. It depends on your home buying goals, your personal finances, and the local real estate market you are looking to buy in.
While you might think that investing more money is always better, it is not necessarily the case. A down payment of 20% has advantages and disadvantages.
|Advantages of 20% down||Disadvantages of 20% less|
|Lower monthly mortgage payments||It can take years to save 20% while home prices rise|
|Lower mortgage rates||Drains your savings for emergencies, home repairs, etc.|
|Avoid mortgage insurance||More risk with falling home values|
Yes, a 20% reduction will lower the cost of buying a home. Borrowers who can make a large down payment save a lot over the life of their mortgage loan.
But a smaller down payment enables many first-time buyers to get on the residential ladder earlier. You can start building home equity and take advantage of the benefits of home ownership without having to wait years to save 20%.
Let’s dig a little deeper into each of these pros and cons.
Advantages of a 20% deposit
Lower monthly mortgage payments are the biggest benefit of taking 20% off.
When you make a larger down payment, you have a smaller loan amount. This means a lower monthly payment and less mortgage interest in the long run.
Let’s look at an example:
- For example, let’s say you buy a $ 200,000 home on a 30 year loan at 3% interest
- If you take a 20% deposit, your payment is only $ 675 per month
- A 5% deposit would increase your monthly payment to $ 800 – an additional $ 125 per month
Another benefit is that higher down payments usually mean lower mortgage rates.
The less money a homeowner borrows, the less risky his loan is to a mortgage lender. Lenders reward this lower risk with a reduced interest rate and lower long-term borrowing costs.
Finally, with a 20% down payment, you can avoid mortgage insurance.
For traditional home loans, private mortgage insurance (PMI) costs around $ 30 to $ 70 a month, according to Freddie Mac. This can add up significantly over time.
Others Low down payment mortgage loan, like the FHA and USDA programs, require mortgage insurance regardless of the amount of the down payment. Only VA loan borrowers are free from monthly mortgage insurance payments.
By cutting a traditional loan by at least 20%, home buyers can avoid these additional costs and save thousands over the life of the loan.
Disadvantages of a 20% deposit
The biggest downside to a large down payment is that it reduces your savings – and the money you have left over for potential emergencies.
As Simental puts it, “If that 20% is your total savings and you run out of cash for emergencies or the six month cushion that many people tell you should have for an emergency fund, I urge you to not to reduce 20%. “
Another major disadvantage is that it can take years to save a 20% deposit.
- For example, let’s say you want to buy a home worth $ 300,000
- 20% less requires $ 60,000 in cash
- If you save $ 500 a month, it will take you 120 months to save $ 60,000
- That’s 10 years to save a 20% deposit!
Remember that property values will increase year on year. So the longer you wait for a 20% deposit, the higher this deposit amount will be.
So for many people it is simply not realistic to save 20%.
It can also be a bad idea to cut 20% off if you don’t plan on owning the home for a long time. For one, it is lowers your return on investment after the sale. Additionally, if the value of your home goes down, it puts more of your money at risk.
Low down payment loan options
Fortunately, a 20% deposit is not your only option.
There are many loan programs that allow much lower down payments. And as long as you can afford the monthly payment (and possible mortgage insurance) that these loans come with, they could be a great choice for you.
This is how the down payment requests are broken down according to the loan program:
- FHA loan: These loans are supported by the Federal Housing Administration and require a minimum down payment of 3.5% if you have a credit score of 580 or greater and 10% if your credit score is 500-579. These loans require both a monthly and a prepayment for the Mortgage Insurance Premium (MIP).
- USDA loan: These are loans for use in certain rural and suburban areas. If you are buying a property in an eligible region, you do not need any down payment whatsoever. Creditworthiness requirements typically start at 640
- VA loan: VA loans are mortgages that are secured by the Department of Veterans Affairs. If you are a veteran or service member, you can qualify for these types of loans. Like USDA loans, they do not require any down payment at all
- Conventional Loans: Conventional mortgage down payments are only 3% of the purchase price. That’s only $ 6,000 for a $ 200,000 home. The Fannie Mae HomeReady Loan, Freddie Mac Home Possible Loan, and Conventional 97 Program all allow for only 3% off
- Jumbo Loans: Jumbo loans are required if you exceed the applicable credit limit ($[currrent_loan_limits] in most of the US). While many jumbo loans require a 20% discount, some lenders today are offering them for just one amount 10% or even 5% down
Another option? Check your local housing market for down payment assistance programs.
Assistance with the deposit (DPA) can offer grants or loans to cover your down payment and / or closing costs. These programs are typically offered by state and local governments, as well as nonprofit organizations.
Eligibility requirements vary, so check with your loan officer or real estate agent about DPA programs in your area.
The bottom line
Don’t let the idea of a large down payment put you off buying a home.
“If you’re stuck on the question of ‘Hey, I need that 20% down payment because that’s what I was taught – this is what I grew up thinking about,’ you get that out of your head,” said Simental.
“You no longer need a 20% down payment to buy a house.”
If you are wondering what down payment to make, contact a qualified mortgage loan officer. They can advise you on all of your loan options, as well as the costs associated with them.