The 20% mortgage down payment is as good as dead

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For first time buyers in the housing market, the challenge of coming up with a 20% down payment on the mortgage is often difficult enough to keep them out of the market. But the fact is, the 20% down payment is almost dead – and has been for quite some time, especially for new buyers.

Most buyers make deposits of less than 20%

“In my experience, about half of my clients know there are loans and/or programs that require less than a 20% discount,” said Kris Lindahl, a real estate agent in Blaine, Minnesota. β€œThe other half still think they must have paid off at least 20% to qualify for a home mortgage.”

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But most people don’t put 20% down on a home, even though this is the benchmark most often cited by lenders and mortgage experts. According to the National Assn, more than 70% of non-cash first home buyers β€” and 54% of all buyers β€” have made down payments of less than 20% in the past five years. from brokers.

Michael Facchini of Chicago was 23 years old when he bought a multi-family home as his primary residence in 2003. He only put down 5% even then.

β€œI still own it and it has proven to be a fantastic investment even after the 2008 crash,” said Facchini, now a branch manager at Fairway Mortgage.

First home buyers miss out

According to the latest data from NAR, the typical down payment for 60% of first-time home buyers is 6% or less. But the association’s research shows that few adults aged 34 and under (just 13%) realize they can buy a home with a down payment of 5% or less.

These low-deposit programs are not new. The FHA has secured home loans at 5% or less since the 1980s. The programs have been available since the 1990s for conventional loans, mortgages not directly covered by the government.

Why don’t home buyers know?

β€œMany financial advisors, including much of the popular media, speak of the ‘traditional conventional loan’ that assumes a 20% discount,” Lindahl says. β€œThis type of loan is considered the gold standard and is most often used to quote mortgage interest rates. Another reason is simply that many banks and credit unions only take out 20% conventional loans, as they are considered ‘safer’ and less risky than other lower down payment mortgages.”

Typical Deposits

Consider the typical down payments for different loan types for the 12 months ending May 2017. This information, from mortgage provider Ellie Mae, represents an 80% sample of all mortgage applications the company processes – approximately 30% of the total loan volume in the US – and is for all purchase loans, not just starters.

conventional loans, the mortgage lenders prefer to do, can have down payments of up to 3% for qualified buyers. Some lenders offer grants to lower even less money. But according to Ellie Mae, most buyers seeking conventional financing have written off 20% in the past 12 months.

FHA Loans, often the go-to solution for starters with modest means, require a minimum of 3.5% down, and indeed, loan-to-values ​​for the period averaging 96%, probably due to rounding.

VA loans are known for offering mortgages that require no down payment at all. Still, loan-to-value averaged 98% last year, likely because borrowers financed their closing costs.

20% is good β€” but not required

The fact is that 20% deposits are not strictly required, but it can be a good idea. Good reasons to deposit at least 20% are:

  • You don’t have to pay mortgage insurance
  • Your monthly amount will be lower
  • You will probably earn a lower mortgage interest
  • Lenders are more likely to compete for your business

One thing is certain: you don’t want to empty all your savings, no matter how much you put in. You’ll want to have some cash on hand for the various expenses, including closing costs, homeowners insurance, and property taxes, that come up when you buy and move.

And you have to be willing to spend even more on the water heater or other appliance that breaks, a lawnmower for that new lawn or furniture for that spare room you’ve always wanted.

Know your deposit options

The “traditional” 20% down payment can become obsolete, even with major lenders. Brian Moynihan, chief executive of Bank of America, told CNBC in May that lowering the down payment requirement to 10% from 20% “wouldn’t involve as much risk, but would help a lot of mortgages close.”

There are strong arguments for and against 20% deposits. It’s a decision that depends on your specific financial situation, how long you plan to live in a home, and the housing market in your area.

Fannie Mae and Cal State Fullerton researched what American households know about mortgage eligibility and came to this conclusion:

β€œCorrecting consumer misconceptions may be a more efficient approach to expanding homeownership opportunities by encouraging households that may already be qualified to own a home.”

Hal Bundrick is a staff writer at NerdWallet, a personal finance website.


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