Do You Actually Need 20% Down?

NerdWallet conducted an online survey by The Harris Poll, asking nonhomeowner Americans what the #1 thing preventing them from buying a home was. At first place with 34% of the votes was “I don’t have enough saved for a down payment.”

While having a solid down payment is important, many people have given up on their dream of homeownership because of the misconception that you need to put at least 20% down.

In today’s blog, we’re debunking this myth. At the end, we’ll also share how Fannie Mae and Freddie Mac’s new rule may actually cause your mortgage fees to go up the more down you do.

Just like how there are many different types of homes to choose from, there are a variety of loans available to homebuyers. It’s important that you connect with a knowledgeable lender who will help you find the program that works best for your unique situation. 

Depending on what loan you choose, there are different requirements for the minimum down payment - ranging anywhere from 0% to over 25%. For example, with VA loans (specifically for active duty and veterans), you don’t have to bring in any down payment. For FHA first-time homebuyer programs, there is a minimum of 3.5% down payment. Conventional loans are the most common and require at least 3-5% down.

Even if you don’t have enough saved for the minimum down payment, it doesn’t mean you have to give up on buying a home. One possible solution is to use a down payment assistance program. Not every lender will offer these, but even for the ones that do, it’s important to understand all of the terms before jumping right into it.

Some programs are structured so that the lender will cover a portion of the down payment for you, but requires you to pay it back in full at a certain time. There may be other conditions, such as not being able to refinance or sell for a number of years. The good news is - the down payment assistance programs through our trusted lender partners are a full grant (meaning you never have to pay it back)!

Many people put their home search on hold until they have a bigger down payment. In some instances, it may be well worth the wait, but in other scenarios, it may actually end up costing you more. Having a larger down payment may lower your monthly payment a little, but that time might be better spent building up equity in your new home.

To put this into perspective, imagine you are renting your home for $2400 a month and plan to spend the next year saving up an extra few thousand dollars to put towards your down payment. In those 12 months, you’re putting an additional $28,800 in your landlord’s pocket.

You may be able to get a $50 lower monthly payment with the higher down, but at a cost of nearly $30K in rent. On the other hand, if you had purchased right away, you could have spent that year putting money in your own pocket and building wealth. 

While this may not be the case for everyone, it’s definitely something to keep in mind. Waiting to save up for a larger down payment may not always be the best route to go, especially in the long run. Your lender should be able to run the different numbers for you and break down the pros and cons to each scenario.

Another factor to consider is that California home prices have historically always gone up year after year. This means that a property worth $600,000 today could be priced at $650,000 next year. 

Fannie Mae and Freddie Mac recently drummed up a lot of attention - and confusion - when they announced their new mortgage financing policies, effective on transactions closing on or after May 1, 2023.

A recent article by New York Post explained, “Under the new rules, high-credit buyers with scores ranging from 680 to above 780 will see a spike in their mortgage costs - with applicants who place 15% to 20% down payment experiencing the biggest increase in fees.”

With that being said, it’s not a reason to panic. Just make sure to speak with a trusted lender who understands your situation and can properly advise you on how these new changes may affect you.

Every homebuyer’s story is different. It’s important to find the right solutions for your specific needs and wants. Our team of local real estate and mortgage experts are here to guide you every step of the way. Schedule a strategy session below and let’s make your dreams of homeownership into a reality!