No, you don't need a 20% down payment to buy a house
Lack of inventory has made for a highly competitive housing market this year, which in turn has pushed home prices up.
According to the U.S. Census Bureau, the average home price in February 2017 was $390,400. This compares to $355,300 in January 2017 and $349,400 in February 2016. Rising home prices makes it difficult for homebuyers to make a sizeable down payment and encourages bidding wars that increase the price tag even more.
It's generally said that a 20% down payment is typical or at least wanted by most sellers and real estate agents. According to a recent Redfin survey, 35.7% of real estate agent respondents said a 20% down payment is generally associated with a successful bid on a home.
With the average price at $390,400, a 20% down payment would be $78,080 - more than many homebuyers have saved up. As such, many are forced to make smaller down payments.
However, Redfin's study found that this might not be as big a detriment as one might think. Nearly one-fourth of respondents said down payments of between 3% and 5% seem to have a good chance at success. In fact, there are many ways to seal the deal on a home without putting up your entire life savings.
Make a connection
Many successful bids come from people who have established a connection with the seller. This doesn't mean they're best friends or even that they know each other. One Chicago area agent, Rano Khudayberdieva, told Redfin that writing a cover letter can greatly improve a prospective buyer's chances of getting a bid accepted.
"Writing a cover letter can improve a buyer's chances of getting a bid accepted."
"You'd rather have a committed buyer who put a little less down than a buyer with 20% down who may back out," Khudayberdieva explained.
Another Chicago area agent, Tim Zielonka, said a buyer who bonded with a seller over a common interest was able to beat out his competitors who made larger down-payment offers.
"I recently had an FHA-backed offer with 3.5% down beat out four other offers, each of which had conventional 20% down loans," Zielonka said. "The sellers were at the showing. I introduced them to the buyers and pointed out that both were huge enthusiasts of both vintage bicycles and classic cars, which put them at ease with one another and enabled them to form a natural connection. Had they not discovered this shared interest, my clients may not have gotten the property."
Explore other loan options
A conventional mortgage requires the buyer either make a 20% down payment or purchase private mortgage insurance, which could potentially add thousands to a home loan. There are, however, other loan products that allow for a smaller down payment without a PMI obligation - as long as you qualify.
If you or your spouse has served in the armed forces, you may qualify for a VA loan. These loans offer very low rates, plus don't require a down payment at all, as long as the sales price of the home is less than the appraised value, according to the U.S. Department of Veteran Affairs.
The Federal Housing Authority has a loan program to encourage first-time homebuyers find a house they can afford while also reducing risks for lenders. Under the FHA program, a buyer can put as little as 3.5% down - as long as their credit score is 580 or higher. But if you've got a not-so-impressive score, don't worry. You can still put as low as 10% down on a home under the FHA program.
In an effort to aid low- and moderate-income families living outside major metropolises obtain adequate housing, the U.S. Department of Agriculture offers a loan program in rural areas. Though it's often called a "rural home loan," it's actually available in the majority of the U.S., though not in very large cities. Like the VA loan, a down payment isn't required for USDA loans.
Seek out down payment assistance
Down payment assistance programs are available to many homebuyers, regardless of whether they've purchased a home before or not. According to research conducted by Urban Institute, these programs have aided in the purchase of many homes across the U.S., largely without risk to the lender or increased fees to the borrower. Every program is different, but many offer to pay a portion of your down payment or closing costs for you.
Though paying PMI can add to the cost of the mortgage, there are situations where purchasing this insurance product is actually your most cost-effective option. For example, if you have an excellent credit score, your lender may give you a generously low PMI rate. Additionally, you'll be able to cancel your PMI once you've paid off 22% of the home price or more. If you know you can reach this goal fairly quickly, it might be worth paying the PMI for a few months and cancelling it as soon as you can.
Coming up with the funds for a down payment is often one of the most difficult hurdles of making a home purchase. Luckily, consumers have myriad options for clearing this obstacle and carrying on with their homebuying journey.
Down payment assistance programs can help alleviate savings stress
Buying a house for the first time can be a confusing and complicated experience. Most first-time buyers find there is a lot more to the purchase than they expected. One of the biggest obstacles consumers face is the price.
The median U.S. home price in 2015 was $296,000, a figure that has progressively inched higher since 2009, when the median was $216,700, according to data from the Census Bureau. Most industry experts will advise homebuyers, if they can afford it, to make a 20% down payment. Doing so will likely help them secure a low interest rate on a residential mortgage while also avoiding the cost of private mortgage insurance.
The daunting down payment
Still, coming up with 20% of nearly $300,000 is a lot to ask - it rounds out to nearly $60,000. Most homebuyers source their down payments from their personal savings, according to the National Association of Realtors' Profile of Home Buyers and Sellers. But a 2015 GOBankingRates survey found that just 14% of people have more than $10,000 in their savings accounts. As such, it doesn't come as a surprise that the typical down payment is well below the 20% mark:
- 6% for first-time buyers, coming out to $17,760 for the 2015 median home price.
- 14% for repeat buyers, a total of $41,440 for the 2015 median home price.
Fortunately, there are plenty of options for those homebuyers who are lacking in the savings department. More than 24,000 homebuyer programs are available to consumers, with down payment assistance programs being among the most popular, according to Down Payment Resource.
DPAs can be helpful resources to prospective homebuyers who don't have enough money in savings for a substantial down payment. But they also help communities, noted Leslie Darling, the executive director of the Chicago Infrastructure Trust, which debuted a new DPA in May, 2016.
"More than 24,000 homebuyer programs are available to consumers."
"We know where there is more home ownership in a community it makes for a greater community and a safer community," she explained to a group of real estate agents, according to DNAinfo.
How to research DPAs
1. Find programs in your area
DPAs are often offered through state, county and city governments, wrote Danny Gardner, Freddie Mac's vice president of Single-Family Affordable Lending and Access to Credit. Your mortgage lender may have one available to you, or know about programs in your community.
2. Research eligibility requirements
Eligibility requirements vary between programs, and might include:
- Home location.
- Previous homeownership status.
- Income level.
If you qualify, you could receive a couple thousand dollars or more toward your down payment or closing costs.
Gardner noted that some programs require borrowers to attend homebuyer education counseling.
Since DPAs are usually available through a government source, funds are often limited. Most programs are issued on a first-come, first-served basis.
While DPAs are commonly regarded as programs for first-time homebuyers, don't worry if you've already owned a home. DPR explained that the U.S. Department of Housing and Urban Development considers anyone who hasn't owned a home for three or more years a first-timer. Plus, there are plenty of programs that don't have a first-time buyer requirement.
3. Ask about payment plans
Repayment requirements also vary. Some programs want all money repaid, while others don't ask for any payments, according to The Mortgage Reports.
At a time when home prices are continuing their rise, an inventory shortage is inspiring bidding wars in many areas, and monetary policy changes are pushing mortgage rates higher, DPAs could become a key aspect of the homebuying process. Making sure you know all options available to you is crucial in making an informed purchasing decision.
Academy Mortgage is one of the top independent purchase lenders in the country as ranked in the 2015 CoreLogic Marketrac Report. Visit www.academymortgage.com to find a loan, get a rate, or calculate your payment today.