Do You Need 20 Percent Down to Buy a House?
Anyone who is hoping to buy a home is sure to hear certain tips repeatedly. Polish your credit score. Get your financial house in order. Educate yourself about home loans (a first-time homebuyer class can be a great way to do this). Save up so that you have the necessary funds for a down payment and other expenses. But how much should you be trying to save? Do you need 20 percent down to buy a house? No, not necessarily. As the National Association of Realtors explains, the average down payment among all buyers is just 12 percent.
The Myth of 20 Percent
Where does the idea of 20 percent come from if it’s not actually what buyers are paying? Why is it so persistent? The answer is simple: private mortgage insurance (PMI). As Business Insider reports, PMI is an insurance policy that protects the lender if the borrower defaults. While homeowners don’t benefit from the policy, they pay for it in the form of a monthly premium that typically costs between 0.2 and 2 percent of their loan’s principal balance. Making a down payment of at least 20 percent means that you won’t have to pay for this extra expense. Therefore, many experts insist that a 20-percent down payment is the ideal.
Down Payment Requirements in the Real World
How much do you really need for a down payment? That depends on a variety of factors, including the type of loan that you’re using. Investopedia offers a breakdown:
- Conventional home loans. Qualified borrowers can find conventional loans with minimum down payment requirements of just 3 percent.
- Jumbo conventional home loans. Jumbo loans are riskier for lenders, so they demand larger minimum down payments. Expect to put down at least 10 percent.
- FHA home loans. Qualified borrowers can secure a home loan with a down payment of just 3.5 percent.
- VA home loans. VA loans aren’t available to everyone. They’re a benefit earned with service. However, the people who have access to these loans can use a home loan with no down payment requirement.
- USDA home loans. USDA home loans have some geography and income requirements, but they don’t have any down payment requirement; 100-percent financing is available for qualified borrowers.
Big Down Payments Versus Small Down Payments
As NextAdvisor indicates, both big down payments and small down payments can have their advantages:
- A big down payment. Making a big down payment takes a healthy chunk out of your principal balance and eliminates the cost of PMI. It generally also means that you’ll snag a low interest rate. You’ll be starting with more home equity. Plus, a smaller balance and lower interest rate mean that your monthly mortgage payments will be lower, which can give you greater financial flexibility.
- A small down payment. Making a small down payment lets you buy sooner. After all, not everyone wants to wait until they have a significant amount of cash saved to buy a home. Even buyers who have strong savings may prefer to hold onto it for other purposes. You may want to have a strong emergency fund. You may be eager to renovate. Or, you may want to invest in other priorities. The ability to make a small down payment lets you decide how to use your resources.
When you’re trying to figure out the best way to reach your housing goals, reach out to PrimeLending West Texas. We understand that every homebuyer is unique, so we listen carefully so that we can help you find the best loan product for your particular situation. Contact us today to get started.