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Pathway To Homeownership: Down Payment Myths
Dated: March 1 2023
Views: 90
For this homeownership series blog post, we are talking about the 2 biggest myths regarding down payments.
Myth #1 – You must have 20% for a down payment to qualify for a mortgage.
First, a disclaimer. Lending guidelines are fluid and change all the time. Getting pre-approved for a mortgage is critical and is always one of the first steps I recommend to those looking to buy a new home. If you are looking for specifics regarding your situation, I advise you to speak with a loan officer. If you need a good loan officer, I am happy to give you some great referrals.
The question, is a 20% down payment required for a mortgage? The short answer, not usually. The amount of a down payment that is required is dependent on the type of financing you are receiving as well as the type of property you are buying.
For a mortgage on your primary residence, you can often get a conventional loan for 3-5% down. FHA often just requires a 3.5% down payment. If you have served in the military, you can get a VA loan with 0% down up to a certain amount (depends on the county in which the property is located) and if the property is in the right location, it could qualify for a USDA loan with 0% down as well. There are special programs that offer 0% down programs, but they often come with some additional monthly fees.
Traditionally 20% down payments have been required when buying an investment property, but I have seen some recent loan options for investment properties at 15%.
What about second homes that you use for personal uses? That will depend on the location and use. Last spring my husband and I purchased a second home to live in while we remodeled our current home. Our lender only required us to put down 5% for that purchase due to the reason of our purchase.
Myth #2 – It’s ALWAYS better to put 20% down so you don’t need to pay PMI.
In a 2019 poll from Nerdwallet, they found that 44% of their respondents who were considering buying homes believed that a 20% down payment was required. How did this myth come about in the first place? The answer has a lot to do with Private Mortgage Insurance (PMI). The lending industry determined that buyers who put down 20% or more were less likely to default on their mortgages and were deemed to be “safer” borrowers. Due to their findings lenders make borrowers who put down less than 20% pay for PMI on certain types of loans. PMI is an additional fee that must be paid on top of the monthly mortgage to help cover the lender’s fee if the borrower defaults on their loan.
Prior to 1998, if you had PMI on your mortgage, it was in many cases nearly impossible to get rid of it. But in 1998, the Homeowners Protection Act was passed which made it mandatory for lenders to drop PMI once an owner had at least 20% equity in their home. That equity could come from paying down your loan, or an increase in the home’s value and appraisal.
This law changed the situation for a lot of homeowners. It was not uncommon that after 5 to 10 years the value of the home would appreciate to a value where the PMI was dropped. More recently, I have seen clients get PMI when they bought their house, and 6 months later their PMI was dropped because their home’s value had increased that quickly.
So, if PMI is much easier to get rid of, is it worth putting down 20% on a purchase? It might not be.
There is a movement, of which I share a lot of the same beliefs, that feel that the most “secure and safe” buyers are those who have some savings ready to pay for any required repairs the property might need. There are groups pushing lenders to waive PMI for borrowers who put down less than 20%, as long as they have additional funds placed in an account that are saved only for repairs as they have found that homeowners who cannot afford major repairs, are more likely to default on their loans. If you are looking to buy home that might need some more expensive repairs, it might be a good idea to consider making your down payment smaller and putting some of that cash into savings.
When looking to buy a house and deciding how much you want to put as your down payment please speak with your loan officer about your specific options, and make sure to look into thinking about having funds to cover any unexpected repairs that might pop up.
Ashley Wolthuis
Ashley Wolthuis is a graduate of Weber State University and furthered her education at Universitat Jaume I in Castellón, Spain, where she earned her Master’s Degree in Development Studies. Today, A....
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