Myths and Truths About Down Payment Requirements
By Emily Wilson
Even in today’s technology-forward world where information is instantly at our fingertips, I am taken by how many people still think one must have 20 percent down to purchase a home. Sure, 20 percent or more is ideal, but let’s be honest: how many homebuyers have access to that kind of cash when an entry-level home is a half million dollars or more?
With the variety of loan programs available today, some homebuyers will voluntarily opt to make a lesser down payment and keep cash on hand for reserves or renovations. Down payment options can be as low as zero percent for our veterans and current U.S. military, as well as buyers in rural areas (oh, hello Ojai Valley!). If one does not qualify for the “no down payment” options, a standard buyer could get into a home with as little as 3 to 5 percent down with a Conventional or FHA loan.
More conservative-minded buyers would be hesitant to support buying a home without a substantial down payment, and there is some validity in that. In most cases, buying without 20 percent down will require you pay mortgage insurance (known as PMI) which doesn’t benefit the buyer, and instead benefits the lender in case you default. That said, PMI is a stepping stone. It’s a bridge to allow one to buy now instead of waiting for their coffers to be full.
The flexibility offered in the current lending climate acts as a stimulus to homeownership for those needing low down payments to enter the market. It allows people to achieve homeownership more quickly and reap the benefits of additional income tax savings, building equity, and pride of ownership.
For the naysayers forewarning of another bubble caused by homebuyers with little to no equity, to them I say this time around is different. There is a fundamental difference in the majority of loans originated today than those of the early 2000s: the ability to repay. Shocking, I know, but in order to finance a home with a limited down payment, one must prove that he/she can actually make the payment along with their other liabilities. That coupled with the loan types chosen by the homeowners of today (over 95 percent of my clients choose fixed rate loans over adjustable) provides for a much more stable future of homeownership.
My best advice to someone thinking about the home-buying process is to start working with a mortgage professional even before you’re ready. A pre-approval or consultation doesn’t cost you anything, and there are ways to strategize your money to get you on the right path to homeownership – with or without 20 percent down.