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It’s been some time since I’ve done mortgage Q&A, so without further delay, let’s explore the following question: “Do you need 20% down to buy a house?”
If you chat with anyone older than 50 (maybe 60), they’ll probably tell you that you need to (or should) put 20% down if you want to buy a house.
For them, it’s the normal, or should I say traditional, down payment needed to secure a mortgage.
And while it might be conventional wisdom when it comes to home buying, it’s not necessarily the reality anymore.
In fact, the median down payment is just 12%, per the National Association of Realtors (NAR) 2021 Home Buyer and Seller Generational Trends report. Despite this, a lot of people still seem to think you need 20% down to purchase a home.
You Don’t Need a 20% Down Payment…
A few years back, the NAR 2017 Aspiring Home Buyers Profile report found that 39% of non-owners believed they needed more than 20% for a mortgage down payment on a home purchase.
And 26% assumed they needed to put down 15-20%, while 22% said they needed a down payment of 10-14% in order to buy. None of those answers are true.
A 2020 study from NAR also had a whopping 35% of respondents going with the 16% to 20% down payment tier, easily the number one answer.
In reality, you may not even need a down payment if you take out a certain type of home loan, or receive gift funds for the down payment.
Even if a down payment is required, it’ll be a lot less than 20% in most cases, most likely less than 5%.
Last year, the typical down payment for first-time home buyers was just 7%, while it was 17% for repeat buyers, per NAR .
It’s common for repeat buyers to use the proceeds from their original home to buy a replacement, making it easier to come up with a larger down payment.
Conversely, first-timers often have a tough time coming up with funds because they can’t tap into home equity.
You’ll notice both figures have moved lower over the years, though average down payments have ticked higher recently, perhaps due to home buyer competition in this hot housing market .
20% Down Payments Used to Be the Norm
Your parents probably put down 20% or more when they bought a house
But back then home prices were a lot lower than they are today (and interest rates a lot higher)
You might only need to put down 3% or 3.5% when you purchase a property these days
But there are still key advantages to putting down at least 20% like no mortgage insurance and a lower interest rate
Back in the day, it was customary to come in with 20% down (or more) when purchasing a property.
But property values were significantly lower those days, and mortgage rates a lot higher.
Times have changed as home prices skyrocketed and mortgage lenders got more competitive (and less risk-averse).
Leading up to the housing crisis seen in the mid-2000s, a zero down mortgage was a common theme. In fact, there were lenders that named themselves after that lack of a down payment…
Of course, we all know what happened next – home prices tanked and low down payment options began to evaporate.
That led to increased FHA loan lending , which requires only 3.5% down if you have at least a 580 FICO score.
And over time, Fannie Mae and Freddie Mac introduced a competing product that allows for loan-to-value ratios (LTVs) as high as 97% (just 3% down).
So we’ve kind of come full circle, though we’re not quite at the zero-down stage just yet.
Though lenders have offered mortgages with just 1% down, such as Quicken , Guaranteed Rate , and United Wholesale Mortgage thanks to the use of grants.
Should You Put Less Than 20% Down on a Home?
You may not need to put 20% down on a home purchase in many cases
But it will cost you more money monthly if you don’t via a higher rate, PMI, and a larger loan amount
It may also make your offer less desirable to home sellers if they have competing bids with larger down payments
So it can beneficial to put down more, especially in a seller’s market
We’ve already answered the original question. You don’t need a 20% down payment to purchase a home.
In fact, you don’t need any down payment in some cases if you consider a home loan from the VA or USDA , both of which offer 100% financing.
You also don’t need to put down 10% or even 5% thanks to widely available programs from the FHA and Fannie and Freddie.
The median down payment is quite a bit lower, around 12% at last glance, and even lower (6%) for the 22 to 30 age cohort.
This age group also said saving for the down payment was one of the most difficult steps of the home buying process.
Now assuming you can muster a 20% down payment, should you come in with less?
This answer is a bit more elusive because it depends on a variety of factors, which include your household balance sheet and your financial goals.
Perhaps it’s better to frame the question the other way around.
Why You Should Put 20% Down on a House
In short, the less you put down on a home, the more you pay each month via your mortgage payment. This happens for three main reasons :
– Larger loan amount (less down means more financed)
– Higher mortgage rate (rates tend to rise as down payments fall)
– Mortgage insurance (added cost to account for risk)
If you put down less than 20%, you wind up with a bigger loan amount (obviously), a higher mortgage rate (usually) because of pricing adjustments, and you have to pay mortgage insurance to protect the lender.
This means your monthly housing costs go up, but you keep more cash in-hand, or at least not in your house.
Let’s assume the home you want to purchase is selling for $350,000 and you plan to take out a 30-year fixed mortgage. This comparison chart shows us how things might look.
3% Down vs. 20% Down: The Math
$350,000 Home Purchase