Is a 20% Down Payment Really Necessary To Purchase a Home?

There’s a common misconception that, as a homebuyer, you need to come up with 20% of the total sale price for your down payment. In fact, a recent survey by Lending Tree asks what is keeping consumers from purchasing a home. For over half of those surveyed, the ability to afford a down payment is the biggest hurdle.

That may be because those individuals assume a 20% down payment is necessary. While putting more money down if you’re able can benefit buyers, putting 20% down is not mandatory. As Freddie Mac puts it:

The most damaging down payment myth—since it stops the homebuying process before it can start—is the belief that 20% is necessary.”

If saving that much money sounds overwhelming, you might be ready to give up on the dream of homeownership before you even begin – but you don’t have to. According to the Profile of Home Buyers and Sellers from the National Association of Realtors (NAR), the median down payment hasn’t been over 20% since 2005. It may sound surprising, but today’s average down payment is only 12%. That number is even lower for first-time homebuyers, whose average down payment is only 7%.

Based on the Home Buyers and Sellers Generational Trends Report from NAR, the graph below shows an even closer look at the down payment percentage various age groups pay:Is a 20% Down Payment Really Necessary To Purchase a Home? | Simplifying The MarketAs the graph shows, the only groups who put 20% or more down on average are older homebuyers who likely can use the sale of an existing home to fuel a larger down payment on their next home.

What does this mean for you?

If you’re a prospective homebuyer, it’s important to know you don’t have to put the full 20% down. And while saving for any down payment amount may feel like a challenge, keep in mind there are programs for qualified buyers that allow them to purchase a home with a down payment as low as 3.5%. There are also options like VA loans and USDA loans with no down payment requirements for qualified applicants.

To understand your options, you do need to do your homework. If you’re interested in learning more about down payment assistance programs, information is available through sites like downpaymentresource.com. Be sure to also work with a real estate advisor from the start to learn what you may qualify for in the homebuying process.

Bottom Line

Don’t let the myth of the 20% down payment halt your homebuying process before it begins. If you want to purchase a home this year, let’s connect to start the conversation and explore your options.

The Truths Young Homebuyers Need To Hear

For many young or first-time homebuyers, purchasing a home can feel intimidating. A recent survey shows some homebuyers ages 25 to 40 may be unsure about the homebuying process and what they can afford. It found:

  • “1 in 4 underestimated their buying potential by $150k or more”
  • “1 in 4 underestimated the increase in value by $100k or more”
  • “47% don’t know what a good interest rate is”

Because they feel uncertain, many young homebuyers have given up on their search, or worse, they’ve decided homebuying isn’t for them and never started on their journey to begin with.

If you’re interested in buying but aren’t sure where to begin, here are three key concepts about homeownership you should understand before you get started.

1. What You Need To Know About Down Payments

Saving for a down payment is sometimes viewed as one of the biggest obstacles for homebuyers, but that doesn’t have to be the case. As Freddie Mac says:

The most damaging down payment myth—since it stops the homebuying process before it can start—is the belief that 20% is necessary.”

According to the most recent Home Buyers and Sellers Generational Trends Report from the National Association of Realtors (NAR), the median down payment for homes purchased between July 2019 and June 2020 was only 12%. That number is even lower when we control for age – for buyers in the 22 to 30 age range, the median down payment was only 6%.

2. You May Be Able To Afford More Home Than You Think

Working remotely, exercising, and generally spending more time than ever in our homes has changed what many people are looking for in their living space. However, some young homebuyers don’t feel they can afford a home that suits their growing needs and have decided to continue renting instead. That means they’ll miss out on some of the long-term benefits of owning a home. As an article recently published by NAR points out:

“Many young adults are underestimating how much they need for homeownership, the survey finds. Millennials underestimated how much home they can afford right now, how much interest they would pay over a 30-year mortgage, and how much home values appreciate, on average, over 10 years…”

Knowing how much home you can afford when starting the buying process is critical and could be the game-changer that gets you from renting to buying.

3. Homeownership Will Become Less Affordable the Longer You Wait

Finally, with mortgage rates starting to rise along with home prices appreciating, putting off buying a home now could cost you much more later. Sam Khater, Chief Economist at Freddie Mac, notes:

As the economy progresses and inflation remains elevated, we expect that rates will continually rise in the second half of the year.”

Most experts forecast interest rates will rise in the months ahead, and even the smallest increase can influence your buying power. If you’ve been on the fence about buying a home, there’s no time like the present.

Bottom Line

If you feel overwhelmed by the prospect of starting your home search, you’re not alone. Let’s connect today so we can talk more about the process, what you’ll need to start your search, and what to expect.

What To Expect as Appraisal Gaps Grow

In today’s real estate market, low inventory and high demand are driving up home prices. As many as 54% of homes are getting offers over the listing price, based on the latest Realtors Confidence Index from the National Association of Realtors (NAR). Shawn Telford, Chief Appraiser at CoreLogic, elaborates:

“The frequency of buyers being willing to pay more than the market data supports is increasing.”

While this is great news for today’s sellers, it can be tricky to navigate if the price of your contract doesn’t match up with the appraisal for the house. It’s called an appraisal gap, and it’s happening more in today’s market than the norm.

According to recent data from CoreLogic, 19% of homes had their appraised value come in below the contract price in April of this year. That’s more than double the percentage in each of the two previous Aprils.

The chart below uses the latest insights from NAR’s Realtors Confidence Index to showcase how often an issue with an appraisal slowed or stalled the momentum of a house sale in May of this year compared to May of last year.What To Expect as Appraisal Gaps Grow | Simplifying the MarketIf an appraisal comes in below the contract price, the buyer’s lender won’t loan them more than the house’s appraised value. That means there’s going to be a gap between the amount of loan the buyer can secure and the contract price on the house.

In this situation, both the buyer and seller have a vested interest in making sure the sale moves forward with little to no delay. The seller will want to make sure the deal closes, and the buyer won’t want to risk losing the home. That’s why it’s common for sellers to ask the buyer to make up the difference themselves in today’s competitive market.

Bottom Line

Whether you’re buying or selling, let’s connect so you have an ally throughout the process to help you navigate the unexpected, including appraisal gaps.

Stay informed


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