Are you thinking about buying a home but aren’t sure if you can afford the down payment? You are not alone. Home prices have continued to rise over the past five years and not everyone can afford a 20 down mortgage.
Now, a single-family existing home in the U.S. has a median price of $255,600, which means a 20% down payment will be $51,120. For many, that is out of reach.
However, there are ways to get around the 20% down rule.
What is the 20% down rule?
The 20% down rule refers to paying 20% of a home’s purchase price as a down payment when buying a home. For example, if the house purchase price is $200,000, you will put down $40,000.
Mortgage insurance is lost money, plain and simple.”
Is it better to put a large down payment on a house?
Well, doing so gives you significant equity in the home right away and will help to lower your mortgage payments.
Another big benefit of putting 20% down on a house purchase is that you don’t have to pay private mortgage insurance (PMI). PMI requires the borrower to pay a monthly premium and reimburses the lender if the borrower defaults on the loan.
Brian Davis, Director of Education at Spark Rental says, “Mortgage insurance is lost money, plain and simple.”
So, while the 20% rule can be beneficial, is it mandatory?
Yael Ishaki, vice president of FM Home Loans says, “The 20% down payment rule is NOT mandatory. Most homebuyers can find a loan that requires far less than 20% down.”
Let’s take a look at what most people are putting down.
How much is an average down payment on a house?
According to the National Association of Realtor’s (NAR) 2017 Generational Trends Report, people under the age of 36 account for the largest share of homebuyers over the past four years. Furthermore, 49% of them have children under the age of 18.
As you can imagine, a 20% down payment can be difficult to come up with at this age, especially since 46% have a median of $25,000 in student debt.
Credit card debt, car loans, child care expenses, and health care costs also reportedly made saving for a down payment more difficult.
So what is the average down payment?
According to NAR, the median down payment for first-time homebuyers for three years straight was 6%, while it was 14% for repeat homebuyers.
Most homebuyers can find a loan that requires far less than 20% down. Obviously credit matters, but less than you’d think”
What’s interesting is, in NAR’s survey of prospective buyers who have never bought a home before, 87% believed they would need to put down at least 10%.
Davis says, “Most homebuyers can find a loan that requires far less than 20% down. Obviously credit matters, but less than you’d think – low-credit home buyers can still get a Federal Housing Administration (FHA) loan, and often a conventional or subprime loan.
With a score above 580 (which is pretty terrible credit), borrowers can get FHA financing with only 3.5% down. Even borrowers with scores below 580 can put down only 10%.”
Let’s look at the FHA program and several others which allow for lower down payments.
How to get a lower down payment on a house
FHA loans are insured by the Federal Housing Administration, which allows lenders to offer better deals to first-time home buyers. The interest rates start as low as 3.5%.
The way it works is, you get the loan from a third-party lender that offers FHA loans. If you default, the FHA will repay the lender to cover their losses. You would still be responsible for the debt, but the lender wouldn’t suffer a loss.
With FHA loans, MIP never disappears, even after the loan balance has dropped below 80% of the property value. That’s not the case with many conventional loans, in which borrowers can apply to have PMI removed at that time.”
Being that the down payment is less than 20%, you will need mortgage insurance (known as MIP for FHA loans).
Davis explains, “With FHA loans, MIP never disappears, even after the loan balance has dropped below 80% of the property value. That’s not the case with many conventional loans, in which borrowers can apply to have PMI removed at that time.”
This is one thing to factor in when deciding which loan to go with, as it can add substantial costs over the life of the loan.
Search FHA lenders here by ticking the box in the left-hand menu for “FHA.”
The U.S. Department of Veteran Affairs provides a VA home loan program for service members, veterans, and eligible surviving spouses.
It guarantees loans to third party lenders, similar to the FHA loan. If you qualify, you can often get a home loan without a down payment or PMI.
Search VA home loan lenders here by ticking the box in the left-hand menu for “VA.”
This program is provided by the United States Department of Agriculture to help develop rural areas. It also guarantees loans provided by participating third-party lenders like the previous two government-backed programs.
If the home you want to buy is in a qualifying area, you can buy a home with zero down payment. However, unlike the VA loan, you will be required to get PMI.
Find a participating lender here by ticking the box in the left-hand menu for “USDA.”
Conventional loans are loans that are not guaranteed by any organization. This makes them more risky to the lender because, if you default, they lose money.
There are parameters put in place for these loans by Freddie Mac and Fannie Mae, such as eligibility requirements and how much can be borrowed.
Loans that follow these parameters are known as conforming loans. Those that don’t are non-conforming loans (discover the difference between the two here).
Conforming loans are less risky and often come with lower rates. Furthermore, there are programs in place that allow for down payments as low as 3% for qualified buyers. Note: borrowers will need to have good credit to qualify for the lowest rates.
If the down payment is less than 20%, PMI will be required. However, as Davis pointed out above, the PMI can be dropped once the loan balance drops below 80% of the purchase price.
How to avoid private mortgage insurance with a 10 down
Many people wonder if there is a way around mortgage insurance, as it can be quite expensive and a major drawback to a lower down payment.
One strategy that has gained notoriety is pulling out a second mortgage, also known as a piggyback loan, to use as your down payment.
For example, if your first loan is for 90% of the purchase price, you put 10% down. Then, you get the second loan for the other 10%. In doing so, you ensure you pay at least 80% of your home’s value and, thus, don’t need insurance.
However, you will have to make payments on two loans and, often, the second one receives a higher interest rate than the first.
To figure out which approach is best for your situation, you will need to work out the costs and risks for both routes and see which is a better deal.
Get around the 20% mortgage down payment
A 20 down mortgage does have its benefits, but it’s NOT mandatory. You most likely won’t even have to put down 10%, as many prospective home buyers incorrectly assume.
With the various options available today, it is smart to browse different lenders, speak with them about your options, and find the one that offers you the best deal.
Don’t let the misconception that a big down payment is required hold you back from getting the home you desire. Here is a list of lenders to start your journey toward home ownership.
Jessica Walrack is a personal finance writer at SuperMoney, The Simple Dollar, Interest.com, Commonbond, Bankrate, NextAdvisor, Guardian, Personalloans.org and many others. She specializes in taking personal finance topics like loans, credit cards, and budgeting, and making them accessible and fun.