Is a 20% Down Payment Really Necessary To Purchase a Home?

There’s a common misconception that, as a homebuyer, you need to come up with 20% of the total sale price for your down payment. In fact, a recent survey by Lending Tree asks what is keeping consumers from purchasing a home. For over half of those surveyed, the ability to afford a down payment is the biggest hurdle. That may be because those individuals assume a 20% down payment is necessary. While putting more money down if you’re able can benefit buyers, putting 20% down is not mandatory. As Freddie Mac puts it:

The most damaging down payment myth—since it stops the home buying process before it can start—is the belief that 20% is necessary.”

If saving that much money sounds overwhelming, you might be ready to give up on the dream of homeownership before you even begin – but you don’t have to. According to the Profile of Home Buyers and Sellers from the National Association of Realtors (NAR), the median down payment hasn’t been over 20% since 2005. It may sound surprising, but today’s average down payment is only 12%. That number is even lower for first-time homebuyers, whose average down payment is only 7%. Based on the Home Buyers and Sellers Generational Trends Report from NAR, the graph below shows an even closer look at the down payment percentage various age groups pay:

As the graph shows, the only groups who put 20% or more down on average are older homebuyers who likely can use the sale of an existing home to fuel a larger down payment on their next home.

Want an example?

Some of our past blogs have described specific purchase assistance programs for Bloomington, Woodbury and other communities as well as the popular Minnesota Housing Finance Agency (“MHFA”) programs for both first-time and repeat buyers. Today’s program is a US Bank specific program called “American Dream”. This conventional loan program can be used by any qualifying buyer purchasing a home anywhere in Minnesota. And, you do NOT need to be a first time home buyer. Only a 3% down payment is needed and much of that can be covered by various assistance programs. If qualified, US Bank will provide a $5,500 assistance loan to you. This loan is at ZERO percent and does not have to be paid back until you sell the home or pay off the mortgage. In other words, essentially free money for up to 30 years! Qualified buyers can also add MHFA assistance programs to the $5,500 plus negotiate up to 6% assistance from willing sellers to help cover much of the rest of your down payment and closing costs. The program does require you to pay only $1,000 of your own money – a small price to pay for an asset generally worth well over $300,000! A bonus feature is you pay NO mortgage insurance in your monthly payment – normally, the only way to eliminate mortgage insurance is to make a 20% down payment. Typically, this feature will save a buyer from $150-300 per month (depending on the price of the home). Other qualifying criteria include attending an educational class, meeting the program income limits (depends on the household size) and having a minimum 640 credit score, too. If you have $1,000 and meet the requirements, this program shatters the myth that you need a 20% down payment to purchase your own home!

What does this mean for you?

If you’re a prospective homebuyer, it’s important to know you don’t have to put the full 20% down. And while saving for any down payment amount may feel like a challenge, programs like American Dream for qualified buyers will allow buyers to purchase a home with a down payment as low as 3%. There are also options like VA loans and USDA loans with no down payment requirements for qualified applicants. To understand your options, you do need to do your homework. If you’re interested in learning more about down payment assistance programs, information is available through sites like Better and easier yet, please call us as we can discuss your particular situation to find an assistance program that meets what you particularly need.

Bottom Line Don’t let the myth of the 20% down payment halt your home buying process before it begins. If you want to purchase a home this year, let’s connect to start the conversation and explore your options.

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