Do You Really Need That 20% Down Payment on a House?

Do You Really Need That 20% Down Payment on a House?

In 2022, experts say that the story you may have heard about 20 percent down is a myth. Here are the best things you can do to avoid it and how to plan for it.

If you want to buy a house, you’re probably putting away money for the 20 percent down payment. Or maybe you’ve given up on your dream of owning a home because you don’t think you’ll ever be able to save up enough money to buy a house outright.

But is it true that you have to put down 20% or is this a myth? It turns out that that “requirement” is more made up than real.

Many people still think, maybe because their parents told them, that you need a 20% down payment to buy a house, but that’s not true, says Alex Elezaj, chief strategy officer and director at United Wholesale Mortgage in Pontiac, Mich.

So where did this number come from, and why has the standard down payment of 20% stayed the same?

“The traditional 20 percent down payment is meant to protect the lender and the whole financial system,” says Aaron Dorn, chairman, president, and CEO of Studio Bank in Nashville, Tennessee. “Theoretically, if you invest the 20% down payment in a property, there is 20% equity in the property from the day the mortgage starts.” Dorn says that this equity can be taken back by the lender in the worst case, if the mortgage goes bad and faces liens or foreclosure.

According to a survey by the National Association of Realtors, 35 percent of consumers think they need to put down between 16 and 20 percent, and 10 percent think they need to put down more than 20 percent.

But Elezaj says that the average down payment is between 8% and 10%. He also says that buyers can put as little as 3% down on a home. “There are many mortgage down payment options that don’t require a 20% down payment,” he says. “Borrowers can choose how much they are comfortable putting down, whether it’s 3%, 5%, or 10%.”

Insurance for private mortgages

Private mortgage insurance is a good alternative to putting 20% down (PMI). “Lenders worry that a borrower with a smaller down payment doesn’t have enough skin in the game,” says Sarah Alvarez, vice president at William Raveis Mortgage in New York City. “So they add mortgage insurance, which protects the lender if the borrower doesn’t pay back the loan.” “The cost of mortgage insurance depends on a number of things that show how likely you are to pay back the loan.” These things include your credit score, the amount of money you are borrowing, and the loan to value. “

The lender buys PMI insurance to cover the risk that you might not pay the mortgage. “This insurance helps cover the risk of not paying back the loan,” says Esther Phillips, senior vice president of sales at Key Mortgage Services in Schaumburg, Ill. “There are different ways to pay for the PMI.”

For example, she says that it can be paid monthly, all at once, or a combination of the two. “You could also take out two loans, one for 80% of the purchase price and the other for the rest, to cover the total amount of money you need.” Phillips calls this a “piggyback” and says it gets around the PMI requirement.

Why some buyers might not want to make a 20% down payment

If they could choose, some buyers might put down 20%, but others might not. Because rates are still historically low and the stock market is doing well, many people want to get the most money they can so they can put their assets to work elsewhere, says Alvarez.

She also says that buyers might want to keep those extra funds in case they need to make repairs or changes to the house. Alvarez adds, “They may also want to make sure they have enough money in case something comes up.” It’s also possible that someone doesn’t want to sell a stock or retirement account for a variety of reasons. Even if they can make the 20% down payment, it might not be in their best interest right now because of taxes or something else. “

Phillips agrees that buyers might want to keep money in the bank or put down as little money as possible for a number of reasons. But how would this affect the monthly mortgage payment? Would the amount still be reasonable enough that it wouldn’t be hard?

“With rates as low as they are, adding $20 to $40 a month to the payment and keeping $5,000 to $10,000 in the bank for emergencies is a great way to have a low payment and peace of mind,” says Phillips.

Programs that help with the down payment

Keep in mind that not all mortgages are the same, and you will probably be able to find one that fits your needs. And Dorn says that lenders look at the whole picture to figure out if a buyer can make payments.

He says, “The down payment alone isn’t a good sign of someone’s ability to pay back the loan.” “Most of the time, credit histories, sources of income, and debt-to-income ratios are the most important things when deciding who can get a loan.

Buyers can choose from a number of programs, which is a good thing. “FHA loans are very popular, and they often only require a 3.5 percent down payment, while USDA and HUD mortgages may not require any down payment at all,” says Dorn.

And those aren’t the only things you can do. “VA loans are also available to people who have served in the military,” says Elezaj. “There are also traditional loans that don’t require a 20% down payment.”

And your local lenders might know about other chances. “At Studio Bank, we’ve put money into a program with a Nashville-based non-profit to help as many of our neighbors as possible realize their dream of owning a home,” says Dorn. “There are many options; you just need to know where to look or work with a local lender who can put you in touch with the resources in your area.”