Do I Need a 20% Down Payment to Buy a Home?
Home Buyer Misconceptions
If you are in the market to buy a new house, you may be asking yourself “Do I need a 20% down payment to buy a home?” The short answer is No. When it comes to down payments, there are some misconceptions. One of those misconceptions is the notion that you must have a 20% down payment to purchase a house. On the other end of the spectrum, some buyers think that they can buy a house easily with no money down. Here, we will examine the down payment options for home buyers:
0% v. 20% – Opposite Ends of the Down Payment Spectrum
Many people think that there is free money available from the government to buy a house or that they can choose to put zero money down at closing. While there are still some government subsidy programs out there, the days of the First Time Home Buyer tax credit are long gone. However, it is true that some banks advertise 0% money down loans. We call this tactic a “bait and switch” because the interest rates are typically higher than the market rate and these banks charge extra fees in excess of $5-10k that are rolled into the loan in exchange for offering their no money down loan. In general, this option is riskier because there is no equity in the house from the start, and often the buyer is left in a negative equity position. On the other end, convention would suggest that a 20% down payment is required to purchase a house. However, this is also a common misconception.
Trends and Options
The median down payment for a home for our Dutko|Ragen clients is around 10%. Typically, first-time home buyers put down 3-5%, sometimes 10%, on a home. Our “move-up” buyers, people who already own and have equity in their home, often make larger down payments such as 10, 20, and 25%. To fund the sale, move-up buyers will frequently use the equity in their current home to purchase the new one.
People who buy at a younger age generally have more money to put down on their next home because they paid down the balance of the home as the value increased over the years. We often advise our clients to get in the market for a home sooner rather than later and stop renting. The sooner you purchase a home, the more likely you will begin to build equity in your starter home. You don’t need 20% down to do it. Purchasing with a lower down payment allows you to get into the market sooner. In the long run, you will have more equity from which to pull when you are ready to move up to your forever home.
If you want to purchase a home but don’t think you have enough cash to do it, you have options. A 3% down payment is generally the minimum. 3% on a $300K condo is $9K for example. There are also income based grants to assist with down payments if you meet or fall under the income requirements. Check out the Virginia Housing Authority for more information.
Tips for Saving
Thankfully, you no longer need to ask yourself that down payment question, “Do I need a 20% down payment to buy a home.” As soon as possible, get on a budget to start saving for your new house because while you are renting, you are paying someone else’s mortgage. The sooner you save $9K for that minimum 3% down payment, the sooner you can stop paying someone else’s mortgage and start investing in your own future. The quickest way to save money is to cut back on lifestyle expenditures. Saving $500 a month will go a long way toward saving for your down payment.
If you have questions about down payments or how to save for one, reach out to Dutko|Ragen at (571) 249-3551 or firstname.lastname@example.org. We have expert real estate agents, financial planners, and loan officers who can help formulate your plan.