Is the 20% mortgage down payment dead in 2021?


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Housing markets in the United States are on fire; soaring values ​​may be the death of the 20% deposit. Especially for first-time home buyers, the challenge of achieving a 20% mortgage down payment can be almost impossible, especially when you continue to save for other financial goals like retirement. Waiting for a bigger down payment could mean missing out on their ideal home or what appears to be a steadily increasing home price on which to base the 20% down payment. Is the 20% deposit dead? Should we still try to put 20% less?

Most homebuyers incline less than 20%

Good friends just won a bidding war on their first home, paying around 33% above demand. A stake of only 5% allowed them to continue bidding on this house (in a booming real estate market). If you have the income, you are still eligible for a mortgage with less than 20% down payment. Smaller down payments will result in a larger mortgage payment and possibly a higher interest rate.

Without the help of previous home equity, first-time homebuyers often struggle to find a large down payment. As a financial planner, I’m okay with not having a large down payment, as long as you have strong financial habits and can save for a down payment. You want to avoid being poor; if you haven’t saved a dollar for a down payment (and maybe credit card debt), you’re playing with fire by buying a home. Let me tell you, as a long time owner, something is constantly breaking or in need of repair.

MORE FORBESWhen is the Los Angeles real estate market going to collapse?

Waiting 20% ​​down could mean missing something

Although I have clients all over the country, my financial planning firm – DRM Wealth Management – is based in Los Angeles and Palm Springs, which means 20% less is a big number. Even for an entry-level single-family home in Los Angeles, there’s often talk of a down payment of $ 200,000 to $ 400,000. It’s a big deal of money. With record high interest rates and scarce homes for sale, I would hate to see people who have managed to save good money for new homes fail because they don’t have quite a 20% down payment.

The flip side here is if you are in a cheaper housing market. If you can’t find the 20% on a $ 100,000 home, you should take a closer look at your finances before you embark on homeownership. Regardless of the cost of the house, you will likely need some cash reserves to qualify for a mortgage. Likewise, you don’t want to spend 100% of your savings on the down payment, as you’ll most likely have to incur moving costs. Most people also have some overlap with renting and moving into their new homes. Don’t forget about other home buying costs like inspections, appraisals, etc.

Typical down payment for the home

Before you bid on a home, talk to a lender to find out what amount you might qualify for. Also talk to your trusted financial planner to determine how much home you can actually afford. If you are a salaried employee, you will probably be able to qualify for a much larger mortgage than you should take. For business owners or the self-employed, getting a large mortgage can be a little more complicated. Your lender may have specific down payment requirements to get the best term mortgage interest rate. Recently a lender demanded a 30% down payment on a jumbo loan for a wonderful home in Palm Springs that a client of mine purchased.

For conventional loans, you can have as low as 3% down payment as a qualified buyer. Many homebuyers always try to save 20% when possible. This can help you avoid higher interest rates and private mortgage insurance (PMI).

Federal Housing Administration (FHA) loans are often a good solution for first-time buyers with relatively modest means. These home loans require a minimum of 3.5% down payment, with most home buyers using these loans not putting much more than that.

Home buyers near retirement

For homebuyers nearing retirement, it can be tempting to make a giant down payment or pay cash for your new home. I would caution against this for several reasons. First of all, once you retire, it will be much more difficult to get a new mortgage. Second, you can always put money down on the mortgage later, but it is expensive and time consuming to get money back from your home equity. Third, while a smaller down payment means a larger mortgage payment, investing the money (rather than using it as a down payment) will give you the most flexibility, financially, for the future. I would also like to caution against getting a 15 year mortgage as you approach retirement, as higher mortgage payments can squeeze your budget or even make you pay more in taxes as you take out a mortgage. larger withdrawal from your retirement account to make the payments (pushing more income into higher tax brackets).

A 20% deposit is a good thing

The reality is that you can buy a home with no 20% down payment. If you’re in a rush to buy a house and can’t save for a down payment, you’re in for trouble. (Remember how fun the financial crisis was for those who bought a home without a down payment?) Choice.

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About Matthew R. Dailey

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