Busting the 20% Down Payment Myth

How Low Can You Go?

Homeownership in the United States hit a slump during The Great Depression. Before the Federal Housing Administration (FHA) was founded in 1934, most loans available to homebuyers were private and mostly unregulated. Those offered by banks varied greatly and it wasn’t uncommon to see down payment requirements upwards of 40%. At the time, a lack of alternative sources for home loans forced families to spend much more on down payments than we see today. And just like that, a myth was born.

While the 20% rule has stuck around as folklore, today’s homebuyers can get approved for mortgages asking for less than 10% down1. Plus, depending on your credit, the type of home you’re buying, and your occupation, you may even meet the eligibility requirements for a zero-down mortgage. Saving for a lower down payment naturally creates more flexibility in your current budget, and for most buyers it means that homeownership may be within reach even sooner than you’d think—exciting, right?

Mortgages Requiring 5–20% Down

Many banks and lenders offer conventional loans. Buyers who do not meet the eligibility requirements for specific government programs designated for low- to middle-income borrowers often consider this loan option. With a conventional home loan, you can expect down payment requirements to vary based on several factors including your credit history, debt-to-income ratio, and conditions of the housing market. Requirements can range from 5-20% of your home’s purchase price.

Several factors help determine your down payment requirement:

• Your credit history and score
• The type of home you’re buying
• The price of the home/total mortgage loan amount

The difference between saving 5% for a down payment and 20% is exciting to most home buyers. For a $250,000 home that’s a $12,500 down payment versus a hefty $50,000. This lower threshold means you may be able to buy a house much sooner and with less impact on your current finances.

When you ask for guidance on which type of home loan is best, experts at Newrez look at your entire financial picture and consider future goals and outcomes to help you decide if a conventional loan is a good move for you. If you’re currently researching on your own, keep this slight catch in mind:

PMI

If you put down less than 20%, conventional mortgages will ask you to pay private mortgage insurance (PMI) each month. This temporary condition could explain some of the 20% myth’s persistence but it’s not an absolute requirement to make homeownership possible. This fee is only required until your home’s loan-to-value ratio (LTV) reaches 78% but can easily add up to hundreds of dollars a month. Contributing more to a down payment will almost always help you save on lending costs.

Mortgages Requiring 3-5% Down

If your credit score is above 580, you could qualify for a loan insured by the FHA. These loans require a down payment as low as 3.5%. If your credit score is below 580, but you meet the other eligibility criteria, an FHA loan will still only require a 10% down payment from you maximum.

You should note that FHA loans don’t typically offer the best interest rates3. If you’re able to afford a conventional loan with a larger down payment, that might still be your more affordable option (even considering added PMI). If you are most concerned with a lower down payment, though, the FHA 3.5% down payment requirement is very appealing.

Mortgages Requiring 0% Down

It depends on a few factors, but there are instances where you can snag a zero-down mortgage.

• VA Loan
  Active Duty Military (and in some cases, retired Members of the Armed Forces) could qualify for a loan secured by the VA. They require 0% down and because they’re government-backed are also free of PMI requirements.
  
  Interest rates are still credit-based, though VA loans typically have lower rates than conventional mortgages.
  
  
• Special/State Programs
  Certain buyers may qualify for special programs that offer zero-down mortgages. One example of this is the USDA Loan, offered to buyers in rural areas.

Why 20% Down Is Still a Good Idea

Even if you can get a mortgage with less than 20% down, you might not want to. It’s important to do the math and consider all costs to determine your best options.

• PMI
  Less than 20% down on a conventional loan means you’ll be subject to PMI. This monthly insurance premium typically costs between 0.5–1% of our loan balance each year, which can be hundreds or thousands of dollars some see as wasted.
  
  
• Equity
  The smaller your down payment, the less equity you’ll have built into your home from the start. This also means that it will take you longer to build equity, which would be a problem if you need to sell or move sooner than you expect to.
  
  
• Lower Payments 
  The higher your down payment, the lower your mortgage loan. And the lower your mortgage loan, the lower your monthly payments. This can significantly impact your cash flow for decades to come.

Most conventional lenders can also offer better interest rates to buyers with higher down payments. This means serious savings over the repayment of your home loan if you work with a lender who can snag a favorable rate for you.

While a 20% down payment is still a great idea for many homebuyers, it might not be possible (or preferable) for others. It certainly doesn’t mean the dream of homeownership isn’t for you. Be sure to understand what you qualify for before counting yourself out. We can help you see how much each loan type could cost you in the end, before making your mortgage decision so you can proceed with confidence.

Ready To Bust The Myth?

1Source https://www.consumerfinance.gov/owning-a-home/prepare/determine-your-down-payment/#:~:text=In%20most%20cases%2C%20you%20need%20a%20down%20payment,and%20lenders%20require%205%20percent%20down%20or%20more.

2Source https://www.fhamortgagesource.com/history-fha-home-loans/

3Source https://www.hud.gov/buying/loans