Common wisdom says you need a 20% down payment to buy a home. Unfortunately for many new homebuyers, a large down payment is simply unattainable. With the median home price in Philadelphia being around $280k, that would be a down payment of $56,000! The good news is that you don’t need a 20% down payment to buy a home. So, where did this myth come from and what are the options for homebuyers?
Myths can be hard to trace, but the 20% myth is new. It spawned from previous generations, namely the Baby Boomers, who leveraged their savings to reduce their interest rates or make payments lower by having a smaller principal (loan amount). It is true, if you are willing to put down a fifth of the price of a home in cash, you have the buying power to demand lower rates or, failing that, to simply have a smaller payment on a long-term loan.
The Current Reality
We don’t live in the same economy the Baby Boomers had when they entered the home-buying market. Today’s millennial buyers don’t have the income-to-expense ratio that allows them to build the types of savings their parents and grandparents could. That is not to say, however, that they can’t buy a new home.
Alternatives to the 20% Down Payment
Today’s home buyers have multiple options for financing a new home purchase. Private Mortgage Insurance (PMI) offers lenders protection against default while the cost to buyers is based on factors like their credit rating and the amount of the loan. At The Marat Tsirelson Lending Group, we offer other options as well including,
FHA loans that allow down payments as low as 3.5%
First Time Home Buyer program that allows down payments as low as 3%
USDA Loans that offer up to 100% financing
VA Loans that offer as much as $0 down payment
Seller Credit – where the seller offers money as an incentive to purchase the home
Grant programs that offer up to 3.5% towards the down payment or closing costs
Why Buyers May Not Want to Pay 20% Down
Even for buyers who can pay a 20% down payment, that doesn’t necessarily mean that they should. New home purchases involve much more than just the purchase of the house, and new buyers aren’t always aware of just what goes into a new home, especially if they have been renting for years or their parents never were able to buy a home. If you’re looking at putting such a large down payment on your home, consider,
What if you find yourself needing unexpected repairs in the first few years of owning the home before you can rebuild your savings?
What if your family situation changes and you need to renovate?
What if you experience an unexpected job loss or another emergency?
What if you simply would like to have savings for later renovations or improvements?
Many home buyers go into a new home with a large down payment expecting that they can simply refinance later. However, maintaining your savings and letting them grow means you may not need to refinance (when rates could be higher) to make the changes you want down the road.
How can we help you or your clients reach their dream of home ownership? Go to www.meetwithmarat.com to schedule an appointment and talk about your or your clients’ options.