BUYING April 6, 2021

The Biggest Down Payment Myth

Hi friends! Today I want to bust a very common myth that hangs over the heads of many potential homeowners.

Kicking off with a disclaimer – every situation and individual is unique. Because of that, there are lots of different opinions on this! It’s important to talk to a financial expert in order to find out what’s best for you. My only goal here is to share information and help clear up a fuzzy topic.

Having the funds to make a down payment (a % of the purchase price paid upfront) is an important key to owning a home. Unfortunately, many people hold misconceptions that lead them to believe they can’t buy when that’s not necessarily the case.

According to Freddie Mac, “The most damaging down payment myth—since it stops the home-buying process before it can start—is the belief that 20% is necessary.”

Data from NAR (the National Association of Realtors) shows that the median down payment hasn’t been over 20% since 2005. And even then, that was for repeat buyers – not first-time homebuyers. As of 2020, the median down payment for first time homebuyers is 7% nationwide, 16% for repeat buyers, and 12% for all buyers. There are lots of different mortgage products out there that allow you to qualify for as little as 3.5% down. VA (Veteran) loans even allow some to put 0% down. Again – I’m not saying that taking advantage of these options is always smart! Just stating what’s out there.

It’s important to note that in a competitive real estate market like Seattle’s, down payment percentages often trend higher. A 2020 article from Seattle Mortgage Planners stated that “most King County residents that finance their home with a mortgage put an average of 18% down.” It’s likely that this is due to the competitive nature of the market… many homes receive multiple offers and a higher down payment is more attractive to sellers and their agents. But keep in mind: down payment amount isn’t everything! Total purchase price, closing date, contingencies or lack-of, and many other terms can all make an offer stronger.

In some cases, waiting until you have enough for a 20% down payment on a home can hurt you in the long run. In a booming market like we’re in now, you run the risk of actually paying more due to higher interest rates and higher prices if you choose to wait. If you’re in a market where property values are going up by 10% per year and your down payment is 10%, one year later you’ll have 20% equity in your home. Two years later you’ll have 30%. A large down payment can be less important in a market like that, but there are no guarantees when it comes to price appreciation. There is a great example of how this could play out in this article.

All of that said, if you are able to, it can be extremely beneficial to put 20% down. It will give sellers and listing agents more confidence in your offer. You’ll be taking out a smaller loan and therefore paying less interest over time. Additionally, you’ll avoid paying PMI (Private Mortgage Insurance) monthly – a cost that comes with putting less than 20% down. PMI helps lenders recover their investment if buyers are unable to pay their mortgage. (Note that you won’t have to pay PMI once you’ve reached 20% equity in your home — which happens when the home has appreciated in value OR you’ve paid your loan down enough over the years). Finally, your lender may be willing to give you a better rate because you’re showing financial stability. (Remember that lenders do weigh other factors such as credit score, employment stability, and more when determining your rate.)

Bottom line: speak to a trusted real estate advisor who can connect you to great lending professionals. They will be able to listen to your goals, take a look at your financial situation, and talk you through the pros and cons of your different loan options. It’s never too early to get started!

Thanks for reading – I hope you found this helpful. As always, I am here if you have any questions at all!