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The 20% Down Payment Myth

How Cash-Strapped Consumers Can Become Homeowners – and Build Equity

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Anyone who has saved for a down payment for a home knows it’s tough – especially for first-time homebuyers.

In 2018, the National Association of Realtors (NAR) found that for 13 percent of first-time homebuyers, the most difficult step in the homebuying process was saving for a down payment.  

But part of that difficulty may stem from not knowing what’s possible.

Some people have the misconception that a 20-percent down payment is required for a home purchase, when in reality, many home loan options exist that may be able to put consumers into a home for as little as 3 percent down. In fact, 77 percent of non-cash first-time homebuyers in 2018 purchased a property using a down payment of less than 20 percent.

It’s not uncommon for those in the mortgage and real estate industry to encounter first-time homebuyers who have questions about how down payments and mortgages work.

 “Mortgages are not one size fits all,” said Ward Morrison, President of Motto Franchising, LLC. “The right loan originator will understand your unique situation and work with you to find you the best option. Just like homeownership, the journey to a down payment looks different across the country based on local home prices, the types of loans you qualify for, competition and opportunities.”

There may be options out there for almost every type of homebuyer. But buyers should prepare and do their research.  Loan options available to first-time homebuyers can vary widely by state.

The Importance of a Good Lender

“How much home do I qualify for?” is the question most often posed to loan originator Karma Herzfeld with Motto Mortgage Alliance in Little Rock, Arkansas.

“I always answer that question with a question of my own. ‘How much of a monthly payment are you comfortable with?’” said Herzfeld. “Borrowers should do the math on how much monthly income they have left over after all of their expenses are paid each month. I can work with them to help them determine an amount.” 

According to Herzfeld, a simple monthly budget works. “I always recommend my borrowers make sure to include discretionary spending like medical emergencies, meals, entertainment and travel so that they don’t end up ‘house poor’ with most of their income tied up in monthly mortgage payments and nothing left for other things,” she said.

In general, Herzfeld estimates that less than 10 percent of her clients put 20 percent down on a home. “Usually, only second- or third-time homebuyers who have built up equity in their current homes put 20 percent down on a new home,” she said. “They’re able to use the equity in their homes to turn a profit and use that as a down payment on their next home.”

Buyers should keep in mind that mortgage insurance is often required when putting down less than 20 percent. Having good credit and verified income are also important for qualifying for loan options with low down payments.