How do you debunk the 20% down payment myth for first-time home buyers?

1 What is the 20% down payment myth?

The 20% down payment myth is the belief that you need to put down at least 20% of the purchase price of a home to qualify for a mortgage. This myth is based on some outdated assumptions and misconceptions about the mortgage industry and the housing market. For example, some people think that lenders only offer 80% loan-to-value (LTV) mortgages, which means you have to cover the remaining 20% with your own funds. Others think that paying less than 20% will result in higher interest rates, fees, and PMI, which will make your monthly payments unaffordable.

2 Why is the 20% down payment myth harmful?

The 20% down payment myth is harmful because it discourages many potential home buyers from pursuing their dreams. According to a survey by the National Association of Realtors (NAR), the median down payment for first-time home buyers in 2020 was only 7%. That means most people are buying homes with less than 20% down, and they're not regretting it. In fact, the same survey found that 88% of first-time home buyers were satisfied with their home purchase. The 20% down payment myth also ignores the opportunity cost of waiting to save up more money. While you're saving, you're missing out on the benefits of homeownership, such as building equity, enjoying tax deductions, and personalizing your space. You're also risking paying more for a home in the future, as prices and interest rates may rise over time.

3 What are the alternatives to the 20% down payment myth?

The good news is that there are many alternatives to the 20% down payment myth, depending on your financial situation, credit score, and home buying goals. Conventional loans with less than 20% down may require a minimum down payment of 3% to 5%, and you may qualify for lower interest rates and fees than other loan types. FHA loans are designed to help low-to-moderate income borrowers and first-time home buyers with lower credit scores and smaller down payments, requiring a minimum down payment of 3.5%. VA loans, guaranteed by the Department of Veterans Affairs, require no down payment, no PMI, and no minimum credit score, but you have to pay a one-time VA funding fee. Finally, USDA loans backed by the U.S. Department of Agriculture require no down payment, no PMI, and no minimum credit score but you have to meet certain income and geographic eligibility requirements.

4 How do you choose the best down payment option for you?

Choosing the best down payment option for you depends on several factors, such as your income, savings, credit score, debt-to-income ratio, and home buying timeline. You also have to consider the trade-offs between paying more or less upfront, such as the impact on your monthly payments, interest costs, equity, and cash flow. To help you make an informed decision, you should compare different loan scenarios and use online calculators and tools to estimate your costs and benefits. You should also consult with a trusted mortgage professional who can guide you through the process and answer your questions.

5 How do you prepare for your down payment?

Preparing for your down payment requires careful planning, saving, and budgeting. To start, set a realistic goal based on your preferred loan option. Calculate how much you need to save by dividing the amount by the number of months until your target home buying date. Track your expenses to identify areas where you can cut back or eliminate unnecessary costs. Additionally, look for opportunities to boost your income and open a separate savings account dedicated to your home buying goal. Automate your savings by setting up a direct deposit or a recurring transfer from your checking account to your savings account. Finally, explore assistance programs that can help you with your down payment and closing costs, such as grants, loans, and tax credits. Research online or ask your lender or realtor for more information.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?