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The 20% Down Myth

If you’re desperate to own a home, you’re likely saving for that 20% down payment. Did you know you need to put down 20%?

The 20% myth is a holdover from the housing crisis, when many lenders tightened lending parameters for a while. In fact, since FHA loans were introduced in 1934, mortgages have not required putting 20% down.

Let’s explore loan options that don’t require 20% down and take a look at the pros and cons of making a smaller down payment.

Loan options
These are your government-backed loan options:

  • FHA mortgage: This loan, aimed at helping first-time home buyers, requires putting down as little as 3.5%.
  • VA mortgage: VA mortgages are the most forgiving, but are only for current and former military members. They require zero down and don’t need mortgage insurance.
  • USDA home loans: These loans also require zero down, but eligibility is location-based. Qualifying homes must be in sparsely-populated areas.

For conventional loans, you can choose from these options:

  • 3% down mortgage: Many lenders will require putting as little as 3% down. Some even offer reduced mortgage insurance on these loans, with no income limits or first-time buyer requirements.
  • 5% down mortgage: Lots of lenders accept a 5% down payment. However, most require the buyer to have a FICO score of 680 or higher.
  • 10% down mortgage: Most lenders will accept a 10% down payment, even with a less-than-ideal credit score.

Each of these loans requires income eligibility and you may need to pay for private mortgage insurance (PMI). However, there are ways that PMI can benefit the buyer as well.

Are you waiting until you’ve saved 20% to put down? You might want to reconsider. In the time it takes you to save, home prices may rise significantly. Rates may go up as well.

Other benefits of a smaller down payment include:

  • Conserve cash: You’ll have more money available to invest and save.
  • Pay off debt: Many lenders recommend paying down credit card debt before purchasing a home. This will improve your credit score and help you land a better mortgage rate.
  • Build an emergency fund: As a homeowner, having a well-stocked emergency fund is crucial.

Cons of smaller down payments

  • Mortgage insurance: PMI is an extra monthly expense.
  • Potentially higher interest rates: If you’re taking out a conventional loan with a smaller down payment, you may have a higher monthly payment because of a higher interest rate.
  • Less equity: A smaller down payment means having less equity in your home.

Before house-hunting, be sure you can afford to own a home. Ideally, your total monthly housing costs should amount to less than 28% of your monthly gross income.

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