Saving enough for a down payment is often a financial barrier to home ownership. Being able to put down a 20% down payment on a home may seem impossible to some – but is it now acceptable to deposit less? Or have down payment requirements increased due to a competitive housing market?
Estimate at any time surveyed over 1,000 people who said they bought a home in 2021 or 2022 — Here’s what the survey revealed about today’s most common down payment amounts.
40% of buyers put 20% or less on a home
The survey found that 40% of recent buyers deposited less than or equal to the 20% standard. Here is the full breakdown:
4% put 0% down
15% put 1% to 10% down
21% put 11% to 20% less
This means that the majority of recent buyers (60%) paid more than 20%.
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Lower installments become more common as the market cools
It should be noted that this survey was conducted in July, and since then the market has continued to calm down. During the peak of the sellers’ market, it would be difficult to get an offer accepted if you put down less than 20%, but as the market cools, buyers can get away with lower down payments, said Matt Greera realtor in the Phoenix market.
“A few months ago you had to deposit a lot to get your offer considered, but now you can get by with a lot less just because the market has changed,” he said. “Rather than buyers working to please a seller, sellers work to please buyers. This means you can deposit less and sellers will accept it because it could be the only offer. You can also deposit less deposit for the same reason A few months ago sellers wouldn’t even look at FHA loans because they thought there was more risk, but now they’re lining up for a buyer with an FHA loan Same thing with VA loans.
Median down payment is now 13%
“Contrary to popular belief, it’s a myth that you have to put down 20% to buy a home,” said Ashley Moore, head of community loans at Chase home loan. “Some home loans may require much less down payment – between 3 and 5% – and the industry average is usually between 6 and 8%. According to the National Association of Realtors, the median down payment in 2022 is 13%.
However, as interest rates continue to rise, the amount of down payments will likely increase as well.
“I see some buyers depositing more money now that rates have risen significantly in order to keep their payment comparable to what it was before financing costs increased in the second half of 2022,” said Ian Katza Licensed Associate Realtor with Compass in New York.
The advantages and disadvantages of a 20% deposit
Even if you don’t need to deposit 20%, there are advantages to aiming for this number.
“A 20% down payment gives you more equity in your home, eliminates the need for private mortgage insurance, and reduces the total amount you finance,” Moore said.
It will also be beneficial if you have to sell your house sooner than expected.
“A consequence of not putting 20% down is that in the event that you have a life change and need to sell or refinance, you may not have enough equity to pay all the associated costs. to this sale,” Moore said. “If you plan to be in a house for five years and a life event happens and you have to sell the property, you probably won’t have enough equity to sell without coming to the table with the money. In other words, when you put more money aside, you have more cushion to withstand market fluctuations and their impact on the value of your home. In this same scenario, if you put less money aside, you could potentially lose the equity you have accumulated.
Plus, a 20% (or more) down payment makes your home offer more attractive to the seller.
“A larger down payment usually puts you in a better negotiating position with the seller because they will know that you are more serious about buying the home and have the financial means to do so,” Rinal said. Patel, a graduate. real estate agent and co-founder of We buy Philly Home. “In a market where there are multiple offers on a home, a larger down payment can also help your offer stand out from the rest.”
But, if a 20% down payment isn’t actually affordable to you, it’s probably not worth it.
“You can be ‘housing poor’ if you have no savings left to pay for other expenses or deal with emergencies,” Moore said.
It’s also not a good idea to deposit 20% if it means you have to dip into your long-term savings.
“If a large down payment means you can’t contribute to a retirement fund like a 401(k), that’s an investment in your future that you can’t catch up on later,” said Judy Duton, editor at Realtor.com. “That’s why homebuyers shouldn’t take too long to put down a large down payment and make sure they’re not neglecting other important financial goals, like an emergency fund or retirement. “
How much should you put on a house?
As a general rule, the more money you invest, the more competitive your offer will be – and the smaller your loan (and therefore the interest paid) will be. But there’s no one answer when it comes to determining your ideal down payment.
“The amount of money you should spend on a down payment depends on your situation,” Moore said. “Putting less than 20% down on your home may be a good idea if any of the following apply to you: You have a good family income but haven’t had time to save for a down payment ; a large down payment will almost completely deplete your savings; or a large down payment is the only thing stopping you from buying a home. Prospective buyers can use online tools, such as an affordability calculator, to help them determine how much down payment they can afford.
It’s also important to keep in mind that buying a home involves more money than just the down payment, Moore said.
“Closing costs are used to pay for things like appraisals, inspections and more,” she said. “These can be up to 3% or more of the final purchase price.”
To figure out how much you should invest, consider your income-to-savings ratio, said Eyal Pasternak, real estate investor and founder of Liberty House Buying Group.
“For example, if you have a high savings balance but a low income, making a big down payment will be fine since your monthly payments will be lower, and vice versa,” he said.
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This article originally appeared on GOBankingRates.com: Is 20% still the standard down payment on a home in 2022?