Do I need to put 20% down to purchase a home?

Are you a first-time homeowner looking to purchase a home? Are you thinking, “I would love to stop paying rent and buy a house, but I don’t have 20% for the down payment?”

For the average American, 20% is a big number. You’ve seen the news of a strong housing market in the last several years. The average home price in Northeast Florida has risen by almost 20% in the last year. That in turn, places a larger burden on buyers to come up with a down payment. Plus, there are additional fees needed for closing costs, homeowners’ insurance, inspections, and appraisal. These costs could make homeownership look virtually impossible for anyone believing they need to put 20% of the cost of the home as a down payment.

Don’t stress! With the cost of rent also rising and mortgage rates at historic lows, often owning a home is less expensive per month than rent, plus you’re building wealth.

20% Down Payment Myth

Most importantly, needing a 20% down payment is a myth.

Yes, you heard me correctly. The 20% down payment requirement is from decades past. There are multiple loan products allowing for 3-15% down payment, and some options for zero percent down!

While it is true that a larger down payment will lower your monthly payment, there are several reasons this is not always the best strategy to implement.

Let’s explore some loan options that don’t require a 20% down payment and take a further look at the pros of a smaller down payment.

Loan options

If you are looking to get a conventional loan for your new home purchase below are some options that most mortgage providers offer. We can connect you with a trusted loan officer for all the details!

1.)  3% down mortgage: Some lenders will grant mortgages with borrowers putting as little as 3% down. Lenders like Freddie Mac may even offer reduced mortgage insurance rates on these loans. May include no first-time buyer requirements and no income limits.

2.)  5% down mortgage: Many lenders allow you to put down just 5% of a home’s value as a down payment. Most lenders will require it to be your primary residence and that your FICO score is above 680.

3.)  10% down mortgage: Most lenders will allow you to put down just 10% with a standard conventional loan. Even with less-than-ideal credit.

Other loan options include FHA, VA, and USDA rural housing, and all have less than 20% down payment requirements.

All loans will have income eligibility requirements. And, if you plan on putting less than 20% down you will be paying PMI (Private Mortgage Insurance).

Why make a smaller down payment?

If you are thinking of buying a home, but you want to wait until you have 20% saved as a down payment, here are a few things to consider. A study conducted by RealtyTrac found that on average it will take almost 13 years to save 20% for a down payment. During that 13-year span, you could be building equity. Home prices will more than likely continue to rise, and it’s a possibility that mortgage rates will too. Be sure to weigh all your options prior to deciding, but know that homeownership is both possible and, in most cases, the smarter financial choice even without a large down payment.

Other benefits to putting down less than 20% include:

• Conserve cash: Rather than emptying your savings account you will have money available to invest and continue to build your savings.
• Pay off debt: The average Floridian has close to $6,500 in credit card debt. Rather than put a chunk of your savings on a down payment, use that money to pay down credit card debt. Credit cards usually carry a high interest rate, so it makes more sense to pay toward that debt. Also, there is no tax deduction for credit card interest, while there is for mortgage interest.
• Improve your credit score: The higher your credit score, the better mortgage rate you can qualify for, especially if your score is above 750.
• Remodel: You may be purchasing a fixer upper. These additional funds will help you tackle projects to make your new home exactly how you want it. Or pay for new furniture.
• Build an emergency fund: All homeowners know the importance of an emergency fund. Unexpected issues occur. Experts recommend budgeting 3% of the value of your home annually for maintenance and repairs. And saving for a rainy day allows you to be prepared for auto maintenance and repairs, medical expenses, vacations and holiday spending.  

Why Choose Summer House Realty

If you are in the market to purchase a new home contact Summer House Realty today. Our experienced agents can help you find the right home for your budget. We also have a network of mortgage brokers we exclusively work with, who can assist you in finding the right loan for your needs. Summer House Realty has two convenient locations, Amelia Island, FL, and Augusta, GA. If you would like to have a free consultation to determine the type of home, location, and budget that best suits you, then contact us now at 904.557.3020.