The 20% deposit is not yet dead

A 20% down payment is generally not required to finance a home purchase, and most home buyers put less down payment.

But the 20% deposit is not yet dead. In fact, a growing share of buyers are paying down payments of at least 20% to compete in today’s sizzling marketplace.

Competitive market leads to higher down payments

Realtors reported that 48% of their home buying clients made down payments of at least 20% in the first quarter of 2021, up from 46% in 2020 and 40% in 2011, according to the National Association of Realtors’ Confidence. Indexation survey. Among first-time buyers, nearly 28% deposited at least 20% in the first quarter, against nearly 26% in 2020 and around 23% in 2011.

A larger down payment strengthens your offer because it assures the seller that you are on a solid financial footing and that your funding is likely to flow.

For example, if the house appraisal is lower than the asking price, you will have to negotiate with the seller to lower the price or pay more money out of pocket. Lenders generally won’t approve a loan for more than the value of the home minus the required down payment.

If you have more than enough for a down payment required by the lender, you can use some of that money to make up the difference between the appraisal number and the sale price.

Still, it’s important to keep perspective and make a deposit It is good for you.

The average down payment on a house

Even though a greater proportion of buyers give up 20%, most first-time homebuyers fail to do this oft-cited benchmark.

Because outliers can skew an average, the telltale number of what other homebuyers note is the median down payment, which means half paid as much or more, and half paid as much or less.

For first time buyers who funded the purchase, the median down payment was 7%, according to a 2020 National Association of Realtors survey. The median down payment for repeat buyers who funded was 16%.

Minimum down payment on a house

The minimum down payment required for a home depends on the type of loan and the criteria of the lender. Here are the minimum down payment requirements for the most common types of loans.

  • Conventional loans, which are not guaranteed by the federal government, can have down payments as low as 3% for qualified buyers. Some lenders offer down payment assistance subsidies to allow for even lower down payments.

  • FHA loans, backed by the Federal Housing Administration, require a minimum of 3.5% down. FHA loans allow lower minimum credit scores than conventional loans.

  • VA loans for military and veterans, and USDA loans for some rural and suburban buyers, generally require no down payment. VA loans are guaranteed by the US Department of Veterans Affairs and USDA loans are guaranteed by the US Department of Agriculture.

Low minimum down payments: nothing new

Low down payment mortgages have been around for decades.

The FHA has supported home loans with 5% or less since the 1980s. Conventional loans have since the 1990s. And some programs for first-time homebuyers offer down payment assistance that can further reduce upfront costs.

Some first-time home purchase programs offer down payment assistance that can further reduce upfront costs.

Yet more than three-fifths (62%) of Americans think you need a down payment of 20% or more to buy a home, according to the. NerdWallet Home Buyer Report 2020. This is probably because a 20% down payment on a conventional loan is taken as an example and often used to quote mortgage rates. And this is an important criterion – with 20% less you can avoid paying for private mortgage insurance.

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Is it worth putting 20% ​​less?

In addition to making your offer stronger in a competitive market and avoiding mortgage insurance, paying a deposit of 20% has other advantages:

  • Your monthly payment will be less.

  • You will likely get a lower mortgage interest rate.

  • Lenders will be more likely to compete for your business.

How much should a first-time buyer deposit?

There is no one right answer for everyone. Deciding how much to invest in your first home depends on your financial situation, how long you plan to live in the home, and the housing market in your area.

Here are some general tips:

  • Avoid emptying your savings account for a down payment. You’ll want to have cash on hand for closing costs, home insurance, and property taxes.

  • Budget for things you will need to buy after you move in, like a lawn mower for that new lawn, and for home maintenance and repairs.

  • Earn more interest on what you save by putting money into a high yield savings account or certificate of deposit. See NerdWallet’s Choices for the best high yield savings accounts and, if you are saving money for the years to come, consider best CD rates.

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About Matthew R. Dailey

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