4 Common Down Payment Myths, Debunked
I break down real estate concepts for first-time homebuyers.
Being able to make a down payment is one of the keys to becoming a homeowner. Unfortunately, there are many misconceptions out there that keep a lot of would-be buyers from realizing that they are capable of making a purchase. With that in mind, I’ve decided to debunk some common down payment myths below. Keep reading to learn what’s true and what’s a fallacy.
Myth #1: You need to put 20% down
For years, putting 20% down was considered the golden rule in real estate. However, fortunately, that is no longer the case. These days, most loan programs - especially government-backed programs like FHA and VA - only require between 3.5% and 5% for a down payment.
That said, if you have the means, making a larger down payment than what’s required can be beneficial. For one, if you put 20% down, you won’t have to pay additional mortgage insurance. For another, putting down a larger down payment can be an effective way to lower your monthly payment overall.
Myth #2: Paying PMI is always smarter than making a large down payment
In today’s mortgage industry, if you put less than 20% down, lenders require that you pay private mortgage insurance (PMI). This insurance policy protects them, and not you, from taking a loss if you end up defaulting on the loan. The cost of your PMI is added into your total monthly payment.
If you’re not able to save up the funds to make a larger down payment, PMI can be a small price to pay in exchange for the opportunity to become a homeowner. However, depending on the terms of your loan, it may end up costing you more, in total, than you would have paid if you made a larger down payment upfront.
It depends on the type of loan you borrow. Most conventional loans stipulate that you only need to carry PMI until you have paid down your mortgage enough to have a 20% stake in the property. However, with FHA loans, their MPI payment - the FHA version of PMI - typically sticks around for the life of the loan if you put down less than 10%, meaning that you can end up paying a lot for it over time.
Myth #3: Your down payment is the only money you need to bring to the closing table
Unfortunately, your down payment amount only represents a portion of the money that you have to bring with you to the closing table. While the exact amount that you can expect to pay will vary, there’s also closing costs and cash reserves to consider.
Closing costs account for any fees that you incur when closing on the home. These can include inspection fees, origination fees, or appraisal fees. They’re usually split between the buyer and the seller and end up accounting for an additional 1%-2% of the property’s overall purchase price.
While cash reserves technically aren’t a charge that you have to pay, they do represent money that you need to have in your bank account at the time of closing. Cash reserves refers to the amount of liquid assets that you have leftover after you pay your down payment and closing costs. Lenders require you to have a certain amount of cash reserves on hand at closing, so that they’ll have reassurance that you’ll still have money leftover to make your mortgage payments.
Myth #4: Down payment assistance is only for first-time home buyers
While its true that many down payment assistance programs are geared toward first-time home buyers, that’s not always a requirement. For one, even if you’ve owned a home before, you may still be considered a first-time home buyer. The Department of Housing and Urban Development (HUD) considers anyone a first-time home buyer, as long as you have not owned a home within the last three years.
For another, rather than being hinged on first-time-homebuyer status, eligibility for many down payment assistance programs is based on other factors like your income, the location of the home, or the home’s purchase price.