Struggling to come up with a down payment? You’re not alone!
44% of Americans can’t buy a home because they don’t have enough saved for a down payment.
With increasing student debt, rising housing costs, and stagnating wages (to name a few), it’s hard to save anything — let alone 20% of a home’s price.
But, to buy a house, you have to have a 20% down payment, right?
Nope! Most loans require less than 5% minimum down to purchase a house. Plus, first time home buying programs can cover all or part of your down payment.
So, saving for a down payment can be a lot easier than you think.
Wondering how to come up with a down payment for your dream home? Read on to find out everything you need to know about down payments.
What Is a Down Payment?
A down payment is the portion of your home’s purchase price that you provide up front. So, if you buy a $200,000 home and put $6,000 (3%) down, you’ll be paying for 3% of your house in cash. Your lender will cover the remaining $294,000 — which is your mortgage.
Most lenders require some down payment because it makes you less risky to lend to. If you have money invested in your home, you’re less likely to stop paying your mortgage. It’s harder to walk away from an investment that you have thousands of your own money invested in. So, a down payment is a security measure for your lender.
Do I Have to Put 20% Down?
The generally accepted rule is that you have to put 20% down when you buy a home. If you’re buying a $200,000 house, you would need to save up $50,000 (that’s a lot!) before you could buy that house. If you can save $500 a month, it would take you more than 8 years to save that up.
The good news?
Most loan programs accept much smaller down payments than 20%. For a conventional loan, you can put down as little as 3%. With an FHA loan, you can put down a minimum of 3.5%. Both VA and USDA loans allow you to put 0% down if you qualify for their loans.
So, for a $200,000 home, you can put down $6,000-$7,000 with a conventional or FHA loan (which are easier to qualify for). If you’re saving $500 a month, you can save for a down payment in a little over a year.
Putting 20% down on a house is no longer required — or the norm. So, you don’t have to save up 20% to become a homeowner.
How Much Should I Put Down?
So, how much do you need to put down? We’ll break down the pros and cons of 20% down vs. less than 20%.
20% or More Down
When you put 20% down on a house, you’ll have smaller monthly loan payments — because you have a smaller loan overall.
Lenders prefer 20% or more down because that means you have a significant stake in your home and it’s less risky for them. You’ll get a lower interest rate and pay less over the lifetime of your loan.
And, with 20% down, you don’t have to pay mortgage insurance — a monthly fee that helps lenders recoup some of their losses if you default (or stop paying) on your loan. This can save you upwards of $100 a month.
However, putting 20% down means you’ll likely have to wait a little bit longer to buy a house. Saving up $50,000 or more can take time and it could potentially drain your savings. If you have the resources to save up 20%, then it can be a great option to have low monthly mortgage payments.
Pros of 20% Down:
- Small monthly payment
- No mortgage insurance
Cons of 20% Down
- Takes a while to save up
- Drains your savings
Less than 20% Down
Most homebuyers put less than 20% down. On a $200,000 home, most put down between $12,000-$24,000. So, at a rate of $500 a month, you could save up for your dream home within 2–4 years.
The main benefit of putting less than 20% down is that you can buy a house much more quickly. It’s easier to purchase a house when you can save up in a few years — instead of almost a decade.
Plus, you won’t have to drain your savings with a smaller down payment. So, you’ll be able to cover any surprise house repairs, furniture costs, or other life expenses. Instead of having all your savings tied up in an illiquid (money that’s hard to reach) asset.
And, a down payment less than 20% can help you get into a house in a hot market — before you’re priced out of the area. If housing prices are rapidly rising, you’ll be able to gain equity that equals 20% down fairly quickly.
With less than 20% down, you’ll have to pay for mortgage insurance. Conventional loans allow you to cancel mortgage insurance once you own 20% of your house. This can happen as you pay down your mortgage or housing values appreciate. But, some programs — like FHA loans — don’t allow you to cancel mortgage insurance for a minimum of 11 years.
When you put less than 20% down, you’ll also have larger monthly payments. And, you likely won’t qualify for the best loan terms — like a low interest rate.
Putting less than 20% down on a home is a good option to get into a home quickly if you don’t have much in savings.
Pros of Less than 20% Down
- Easier to save up for
- Can buy a house sooner
Cons of Less than 20% Down
- Have to pay mortgage insurance
- Larger monthly payments.
So, the good news is that you don’t have to save up tens of thousands to put down on a home if you don’t have the funds just yet. You can put less than 20% down and still have your dream home.
If you need help finding your dream home, we can help! Head over to Ribbonhome.com to see how we can upgrade your offer to a Ribbon Cash offer.