Debunking the 20% Down Payment Myth
Are Down Payments on Homes always 20%?
Short answer, NO.
Contrary to what is commonly portrayed in pop culture, a mortgage (the money you borrow from a lender) is not always equal to 80% of the price of a home.
Likewise, those sources and others (maybe your parents?) often perpetuate the belief that a down payment (the money you pay towards the cost of the house at the time of purchase) means 20% of the price of the property being purchased.
According to the America at Home survey by NeighborWorks America, millennials (defined as ages 18-34) think that the minimum required down payment on a home is 21%.
This belief, while rooted in some truth, is commonly not the case.
In fact, the median down payment for first-time homebuyers has been 6% of the purchase price for the last three years. Six percent!
On a $150,000, the difference between a 6% down payment and a 20% down payment is $21,000.
We bet saving $9,000 seems much more achievable than $30,000 – and there are some ways to lower that down payment even more!
Mortgage Loan Programs with under 5% Down Payments
There are a number of mortgage loan programs that you should consider for a down payments less than 20% that are designed to help low- and middle-income homebuyers over the 20% hurdle.
- Federal Housing Administration (FHA) loans – 3.5% (provided your credit score is above 580. If your credit score is lower, the down payment percentage is closer to 10%; still much better than that 21% you were so worried about!)
- Home Possible Advantage mortgage loan from Freddie Mac – 3%
- USDA’s Single Family Housing Direct Home Loan – 0% (NO down payment required!)
- VA home loans – 0% NO down payment required. As the name hints, these loans are reserved for veterans/individuals who have served in the military.
Even conventional loans from your bank could have a down payment percentage as low as 5%. The drawback of these mortgage assistance options or having a down payment below 20% is that private mortgage insurance will be required.
Beware of Private Mortgage Insurance
When you pay less than a 20% down payment, most lenders will consider you to be a “risky borrower” and require you to purchase private mortgage insurance.
Private mortgage insurance is an additional monthly payment that protects the lender in case you default on your loan payments. The real downside is that this money goes to helping your lender (not you) and not toward helping you build equity in your home.
Down Payment Assistance Loan
A great way to avoid having to pay private mortgage insurance is to take advantage of our Down Payment Assistance (DPA) loan.
At NeighborWorks of Western Vermont, we offer a DPA loan for a 20% down payment on your dream home. Unlike many mortgage loan programs, there is no income cap or first-time buyer requirement for the DPA loan. You can pair our DPA loan with your mortgage so you’ll have two loans that cover 100% of the purchase price of the home.
Our DPA loan is the best of both worlds: it allows you to buy a house with 0% down, but it doesn’t charge expensive Private Mortgage Insurance. In the long run, it’s the same as saving 20% of the home’s purchase price, but you get to live in your dream home while saving it!
Become a Confident Homebuyer
It’s important to note that many of the loans mentioned above, including FHA mortgage loans or our own DPA loan, will require you to take a homebuyer education class.
At NeighborWorks of Western Vermont, we offer our Homebuyer Education Classes in Rutland, Addison, and Bennington counties throughout the year. If you’ve been day dreaming about your own home, be sure to sign up—you’ll learn everything you need to know about the homebuying process.
We also help you figure out what you need in terms of financing with the one-on-one financial coaching session with our Home Purchase Advisor that comes along with taking the class.
Happy house hunting, see you in class!
Author: Jillian Branchaud, AmeriCorps member serving with NeighborWorks of Western Vermont