How to Buy a Home When You Haven't Saved for a 20 Percent Down Payment

The golden rule of life—treat others as you wish to be treated—is a good one to follow. But the golden rule of real estate? Not so much.

The golden rule of real estate says that you ought to have a 20 percent down payment when you purchase a home. It's a great idea in theory, but in practice, it can be incredibly difficult for buyers (and particularly younger, first-time homebuyers) to put forth 20 percent of a home's asking price. Moreover, buyers need to remember they'll likely be responsible for some if not all of the closing costs, meaning even more money is required up front to get the keys to a home.

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20 Percent: Not a Magic Number

There are some real reasons to aim high with a down payment, but it’s not the be-all-end-all, Joe Zeibert, senior director of products, pricing, and credit for Ally Home, told Neighborhoods.com.

“In a seller’s real estate market where there may be competing offers, a buyer with a larger down payment may be attractive to the seller since it demonstrates a stronger likelihood the person has the financial ability to secure the final mortgage,” he says. 

On the flip side, though, people putting down less money allows for more cash on hand for other items or investments. “Free cash flow and liquidity are a critical part of personal financial planning,” he says.

Zeibert suggests taking stock of your personal situation and how long you want to be in a home before deciding how much to put down, as well as speaking with a home loan adviser.

Twenty percent is still the accepted golden rule, but buyers who are adamant about sticking to it can be "seemingly swimming upstream," says Tammi Lindley, senior loan officer with The Lindley Team at Mortgage Express. 

"With today’s average home prices being so much greater than when our parents and grandparents purchased their first homes, 20 percent is a pretty high bar, especially if the buyer isn’t rolling over proceeds from a previous home sale into the new home purchase," she says. 

Saving up for a 20 percent down payment can take years, and home prices and values will likely rise during that period. Translation? A buyer would need to save more and more each year while also accounting for rent prices going up.

"I just don't think 20 percent is a magic number," financial analyst Lou Haverty says.

But what about PMI?

Traditionally, one aspect of the golden rule was to make buyers reluctant to leave their mortgage because they would lose the significant chunk of equity they put in, Haverty says. But he notes that's simply not true, pointing to his own experience of purchasing a condo with 10 percent down. 

"I was just as motivated to keep my equity as I would've been if I put 20 percent down." While Haverty concedes it's important for buyers to put some equity in (avoiding zero percent down), the specific amount should be considered case by case based on a buyer's financial picture.

Richard Bettencourt, board president of the National Association of Mortgage Brokers, says the main reason it's called the "golden rule" is because an 80 percent loan-to-value ratio eliminates the need for PMI.

"When applicants use a down payment of less than 20 percent, then PMI must be placed on the home loan to insure the lender in the event of a foreclosure," he says.

But contrary to popular beliefs, that PMI payment—which many buyers perceive as very expensive—isn't standardized across the industry. Depending on factors such as borrower credit scores, the loan amount for the transaction, and the percentage put down (up to 19.99 percent), PMI can actually be quite affordable, Bettencourt says. 

"If a borrower is using a 15 percent down payment with a 760 credit score, the monthly PMI could be quite small relative to the loan amount," he says. Over the past 10 years, private mortgage insurance companies have worked to reduce what are called PMI risk factors (the higher the factors, the higher the PMI) and change things for the better, Bettencourt says.

If PMI is the main thing to consider, buyers are better off working to improve their credit scores and put forth a higher down payment rather than focusing solely on that 20 percent number. There are also other strategies to minimize PMI, says Deb Tomaro, a broker associate at RE/MAX Acclaimed Properties in Bloomington, Indiana.

"I just had a couple purchase a home and negotiate for the seller to pay their PMI fee up front, one time." Now, Tomaro says, they don't have ongoing PMI. The couple put 10 percent down on the home, she says.

So how much should you put down?

So, we've demystified the 20 percent rule. But there are still other variables that factor in to how much you should put down. That's where the type of loan you're eligible for will come into play.

For homebuyers who are active duty or honorably discharged veterans, the Veterans Administration offers mortgages with a zero percent down payment. Although it's only available to a select subset of the population, Bettencourt says he believes the VA home loan is the best in the United States.

Homebuyers who qualify for certain Federal Housing Administration loans can put down as little as 3.5 percent, while Freddie Mac and Fannie Mae offer conventional mortgages with 3 percent down payments. There are also special benefits and programs for first-time home buyers, which vary state by state. 

"Over the last six years, there have been some incredible loan programs made available to those potential homebuyers who will be unable to secure assets for a 20 percent down payment," Bettencourt says. "Almost every state has their own state bond program that provides loan programs with down payments ranging from zero to 3 percent."

Bettencourt, based out of Boston, notes that his market is among the most expensive regions in the United States. "It was imperative that loan programs were available for those who need some assistance with making the dream of homeownership a reality," he says.

In New Mexico—though not as expensive as Boston—one program allows first-time home buyers to purchase a home with as little as $500 down, says Albuquerque-based broker John Myers.

"It's best to meet with a loan officer and discuss the best option for your situation," Myers says, suggesting buyers shop around for the most competitive interest rates and lowest origination fees.

A mortgage broker is also a helpful option, says Bettencourt, noting that independent brokers can provide an array of loan programs with some of the lowest rates and fees. And no matter how much you decide to put down in the end, he says, you'll want to do your diligence.

"A smart borrower will get an estimate from a broker, a non-depository institution, and a community bank so they can compare apples to apples," he says.

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