Monday, November 28 2022

It’s a myth that never really seems to die — “You can’t buy a house without putting 20% down.”

What does that mean for the aspiring homeowner? If that 20% figure is correct and you want to buy a $300,000 house, you can only borrow 80% of that purchase price. You have to come up with that last 20% out of pocket.

20% of $300,000 is $60,000. Most people don’t have a spare $60,000 sitting around to put down on a house. Even if they have saved diligently, much of those savings may have been diverted to a tax-deferred retirement plan like an IRA or 401(k) — funds that can’t be used to purchase a personal residence.

So is that 20% number fact, or myth? If it’s a fact, homeownership would seem to be out of reach for many households.

If you aspire to homeownership but don’t have that kind of disposable cash, take heart … that 20% threshold is a myth. You don’t need to put 20% down to buy a home under most circumstances … but several factors contribute to how much lower you can go, including your credit score and the loan program you select.

Here’s what you really need to put down …

What you Really Need to Put Down on a House

1. Conventional Fixed-Rate Mortgage

Most lenders are flexible with down payments for conventional fixed-rate mortgage loans. You can even put more than 20% down if you want to. But conventional fixed-rate mortgages go down to as little as 10% or even 5% down. Note that lenders may require higher down payments from borrowers with lower credit scores.

2. Conventional Adjustable-Rate Mortgage (ARM)

The interest rate on an ARM changes based on prevailing market interest rates. Lenders require a down payment of as high as 20% but may accept a down payment of as little as 3%. Again, a borrower with a higher credit score may be more lenient about the down payment they require.

3. FHA Loan

The US Federal Housing Administration (FHA) is a government organization with a mandate to encourage homeownership.

One way they do this is by ensuring specialized FHA loans for first-time homebuyers, including those who may have less-than-perfect credit. An FHA loan only requires 3.5% down.

In the case of that $300,000 home, that means the buyer only has to come up with a down payment of $10,500 — much better than $60,000.

4. VA Loan

Military veterans and active-duty service members may qualify for a mortgage loan insured by the US Department of Veterans Affairs (VA). These loans may require no down payment at all.

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How much you put down on a house depends at least partially on your financial situation and your credit rating. It’s also a matter of personal preference, risk tolerance, and overall financial strategy.

While most people don’t need to put 20% down on a house, it may be a smart financial strategy for a number of reasons.

But fortunately for households that don’t have large cash reserves, many avenues exist to acquire a home — and the legacy-building benefits of homeownership — without a 20% down payment.

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