Do You Really Need 20 Percent Down?

Posted on Tuesday, January 12, 2021

Conventional wisdom says that prospective homebuyers need to put 20 percent down on the purchase of a new home. That isn’t necessarily true. It is possible to buy a new home with a much lower — or in some cases — no down payment. How? We’ve put together a primer to help you through the intricacies of down payments and home loans.

What is a Down Payment?

A down payment is the money you’ll put down during your mortgage closing. It is the check you write before your home is officially yours. This money is separate from your home loan, which is provided by your lender.

The suggested amount for a down payment is 20 percent of the purchase price of your new home. In Vanbrooke, homes are priced from the $200,000s, which means you would need to put $40,000 down. A $300,000 home would require $60,000 down. If that amount seems unrealistic, you are not alone but there are many home loans out there that require a much lower cash outlay.

Types of Loans

There are a number of loan types that allow you to put anywhere from zero to 3 percent down. These loans come with conditions, but they are not onerous and can help you buy the home of your dreams for less than you may think.

Conventional Loans: Conventional loans are offered by lenders at higher interest rates. Lenders have different requirements and set their own percentages, but it is possible to get a loan that allows you to put anywhere from 3 to 5 percent down. If you have a credit score above 620 points, you are more likely to get a better loan percentage.

FHA Loan: FHA loans are government-backed and require you to put at least 3.5 percent down. In order to obtain this type of loan, you will need a minimum credit score of 580. It is possible to get an FHA loan with a credit score between 500 and 579 but you will be required to put at least 10 percent down.

VA Loan: Veterans do not need a down payment to qualify. There are service requirements, however, and veterans should check with the Department of Veterans Affairs to see if they qualify. Spouses of active-duty military or veterans who have died in service or have a service-related disability also may be eligible.

USDA Loan: Homebuyers who are have not served can get a USDA loan that will relieve you of having to put money down. To qualify, your home must be in an approved rural or suburban area. Members of your household will need to meet income requirements as well.

Is a Lower Down Payment Right For You?

If you don’t have $40,000 or more in savings to put toward a down payment, pursuing a lower down payment will help you get into a home sooner than anticipated. Note, however, that you will be required to purchase private mortgage insurance (PMI). This is insurance that protects your lender if you default on your mortgage loan. However, you can request that your lender remove PMI once you’ve reached 20 percent equity in your home. Some lenders will do this automatically once you have built more than 20 percent home equity. With home values growing, reaching that 20 percent equity threshold can happen quickly.

Your interest rate will most likely be higher. This means you will pay more interest over the life of your loan. The good news is that interest rates are very low right now so even a higher interest rate may not dramatically increase the amount of your mortgage payment.

The Bottom Line

The bottom line is that if you don’t have 20 percent of the purchase price to put down on the home you love, that doesn’t mean your new home dreams have been dashed. Your lender may be able to lower your down payment and get you moving into a new home much faster than you originally thought.