Example 1: 20% Down Payment
Is just Folklore. There’s many different options when it comes to down payments. Both below and above the 20% mark.
The idea that you need a 20% down payment to buy a home is one of the biggest misconceptions in real estate. While putting 20% down has its advantages, it's not a strict requirement. Let’s break this down:
Where Did the 20% Myth Come From?
Avoiding Private Mortgage Insurance (PMI) – Lenders typically require PMI if you put down less than 20% to protect themselves in case of default. This added cost made people believe 20% was the required minimum.
Traditional Lending Standards – Decades ago, before government-backed loans became more common, lenders preferred 20% down to reduce risk.
Financial Advice for Stability – Many financial experts push 20% because it leads to smaller monthly payments, lower interest costs, and no PMI.
The Reality: Lower Down Payment Options
There are several loan programs available that require much less than 20%:
FHA Loans – As low as 3.5% down for credit scores 580+ (or 10% for scores 500-579).
Conventional Loans – Many lenders allow as little as 3-5% down, though PMI is required under 20%.
VA Loans – 0% down for eligible military service members and veterans.
USDA Loans – 0% down for homes in eligible rural areas.
First-Time Homebuyer Programs – Many state and local programs offer grants or down payment assistance.
What Should the Average Person Do?
Assess Your Financial Health – Consider factors like savings, job stability, and debt. While a smaller down payment can get you in a home sooner, ensure you can afford the monthly costs.
Compare Loan Options – Shop around for lenders offering the best terms for low-down-payment loans.
Factor in PMI Costs – If putting less than 20% down, calculate how much PMI will add to your monthly payment. In some cases, it's a small trade-off for homeownership.
Consider Your Market – In high-cost areas, saving 20% could take too long, and home prices might rise faster than you can save. A smaller down payment might be the better move.
Have a Financial Cushion – Don’t put all your savings into the down payment. Keep an emergency fund for unexpected repairs or expenses.
Bottom Line
While 20% down is ideal, it’s not necessary. Many buyers successfully purchase homes with far less. The best approach depends on your financial situation, local market conditions, and long-term goals.
Last updated