It is time to dispel the myth of the 20 percent down payment. While a large down payment can help a home buyer to get more favorable loan terms, it is certainly not mandatory when buying a house, especially when it comes to first-time home buyers.
“In my experience, most of my clients, especially first-time home buyers, are not aware of the different loan programs that are available with lower required down payments; or of the programs that can actually assist qualified borrowers with some, or all, of their down payment,” said Tom Maison, a Senior Loan Officer with Fairway Independent Mortgage Corporation.
Make the Call
Prospective home buyers who do decide to call their lender are quickly discovering that they have a number of options to get them into the home they want despite not having 20 percent of the purchase price to use as a down payment. According to the National Association of Realtors (NAR), more than 70 percent of non-cash, first-time home buyers – and 54 percent of all buyers – made down payments of less than 20 percent over at least the past five years.
NAR research has also shown that the typical down payment for over half of first-time home buyers is 6 percent or less. However, they also discovered that only 13 percent of adults 34 and younger are aware that they can buy a house with a down payment of 5 percent or less!
This lack of awareness is puzzling considering the Federal Housing Administration (FHA) has backed home loans with 5 percent down or less since the 1980s and conventional (not government-backed) loan programs with low down payments have been around since the 1990s. Why are more home buyers not cognizant of these low down payment options?
“Marketing and advertising put out there by many lending institutions typically use a standard 30-year, fixed rate, conventional loan, with a 20 percent down payment, in order to show the most favorable terms and lowest interest rate,” Maison explains. “Also, after the 2008 financial crisis, some lenders were only offering loans with a 20 percent down payment because they are considered a ‘safer’ loan. A lot of potential home buyers today believe that their only option is to put 20 percent down.”
Check your Options
Generally speaking there are three major loan types: Conventional, FHA, and VA.
Conventional loans are not guaranteed or insured by any government agency, so they tend to be viewed as riskier loans by most lenders, making qualification more difficult. Some buyers may be able to qualify for conventional loan programs with down payments as low as 3 percent, but most people end up needing to put down closer to 20 percent in order to qualify. The benefit for the borrower, however, is lower interest rates and more favorable loan terms.
FHA loans are insured by the Federal Housing Administration and they are the go-to loan type for the average first-time home buyer, although you don’t have to be a first-time home buyer to qualify. FHA loans have a minimum required down payment of 3.5 percent and there are number of programs for qualified buyers that will assist with this down payment.
VA loans are guaranteed by the U.S. Department of Veterans Affairs and are available to United States Veterans and Service Members. These loans typically require no down payment for those who qualify.
Do the Math
Low down payment loan options open up the housing market to a much wider range of home buyer, but going with the lowest option does not always make the most financial sense.
The benefits to putting 20 percent down include:
- No mortgage insurance
- A lower monthly payment
- A lower interest rate in most cases
If a 20 percent down payment is within your means, then it may be a good idea to choose that option. However, if the larger down payment will drain your accounts, or even if it is just not a possibility, then there are other options, and it definitely cannot hurt to call your lender to find out what they are.