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Opinion, commentary, and analysis on everything that makes the U.S. housing economy tick -- not to mention the ghosts in the machine, too. Written by HW's team of editors and reporters each business day.
Lending

4 misconceptions buyers have about down payments

Do you need 20% down?

August 7, 2015

When consumers begin to consider homeownership, they often get stuck at the down payment. However, many buyers, especially first-timers, subscribe to some untruths about down payments and it may be keeping them on the sidelines for much longer than needed.

1. You need 20% down.

It could take an average of 12.5 years to save up a 20% down payment for a median priced home. While 20% down was a standard for conventional loans, today’s buyers have many other options. And that’s good news. When otherwise qualified buyers think they need 20% down, they may stop their home search and remain on the sidelines longer than necessary. 

The Consumer Protection Financial Bureau found that nearly half of homebuyers don’t shop around for their home loan. Buyers should investigate conventional loans with a lower down payment, FHA, VA, USDA and the Fannie Mae and Freddie Mac 3% down products. Each type of loan has different requirements to qualify, but they may help buyers get a home loan with down payments ranging from 0% to 3.5%. Down payment programs can also help you meet part or all of your down-payment requirement.

2. It’s always better to put down a big down payment.

Many lenders recommend putting down 20% if possible. However, that may not be the best fit, even if you have those funds available. Buying a home doesn’t just involve the cost of the home loan and down payment. Buyers need to consider moving expenses, home repair, warranties, appliance purchase and more. If 20% down makes you “house poor,” you may not want to deplete your savings account to meet that threshold. In fact, homeownership counseling can help buyers evaluate their complete financial picture so they can make the best decision for their personal situation.

3. Sellers won’t accept offers with a gift or homeownership program for the down payment.

Sellers have often heard that cash offers are better because they’re quick and will cost them less. However, consider that buyers with a gift, grant, or some type of homeownership program, have an extra cushion to bargain with, allowing them to compete with other buyers on price and seller-paid costs. They key is for the buyer to have everything ready and documented, providing the seller with peace of mind. In fact, some programs cover items like closing costs and other seller-paid costs, allowing the seller to gain even more in the sale.

4. Down payment programs make home financing more difficult.

Homebuyers typically want the fastest and easiest way to get them to their goal. However, the process of getting qualified for and using a homebuyer program is very similar to that of securing a first mortgage. There will be paperwork and effort, but much of the same information is collected. The key is to begin the process early, not after you’ve found your dream home. Buyers should know that down payment programs are offered by different program administrators, often state and local housing finance agencies. They approve participating lenders who are qualified to write the loan associated with the program and understand how to incorporate this special financing into the home loan without complicating or prolonging the real estate transaction.

Like everything in real estate, down payments aren’t one-size-fits-all. Buyers should investigate all their options so they can get the right home financing option for their situation.

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