Still Saving for 20%? You May Be Waiting for the Wrong Number

One of the most common things I hear from potential homebuyers is:

“I’m just trying to save enough for a 20% down payment.”

Saving money is rarely a bad idea. But waiting until you have 20% down before even talking to a lender may be unnecessary — and in some cases, it could keep you on the sidelines much longer than you need to be.

Yes, 20% down has benefits.

No, you don’t necessarily need it.

Conventional Financing Can Start at Just 3% Down

Depending on your qualifications and the loan program, conventional financing may be available with as little as a 3% down payment.

Let’s put that into real numbers.

On a $350,000 home:

3% down = $10,500

20% down = $70,000

That is a difference of $59,500.

Now, that doesn’t mean everyone should automatically choose 3% down. A larger down payment can reduce your loan balance, lower your monthly payment and potentially eliminate private mortgage insurance.

But $59,500 is also a pretty significant amount of money.

For many buyers, keeping some of that money available for emergency reserves, moving expenses, furniture, improvements or the inevitable first trip to Home Depot may be worth considering.

Because houses have a remarkable ability to discover things you didn't know you needed to buy.

What About Mortgage Insurance?

If you make a conventional down payment of less than 20%, private mortgage insurance — commonly called PMI — will generally be part of the equation.

PMI protects the lender, not the borrower, but it helps make lower-down-payment conventional financing possible.

And PMI isn't necessarily permanent.

Depending on the loan and your circumstances, mortgage insurance can eventually be removed as you build sufficient equity and meet applicable requirements.

So rather than automatically viewing PMI as something you must avoid at all costs, I prefer to look at the entire financial picture.

How much cash do you have?

What would your monthly payment be?

How much money would you have left after closing?

How long do you expect to own the home?

Those questions matter more than simply saying, “20% down is best.”

Today's Market Makes the Conversation Even More Important

Mortgage rates remain elevated. Freddie Mac reported that the national average 30-year fixed mortgage was 7.03% as of September 24.

At the same time, buyers have something we haven't seen much of in recent years: more inventory and potentially more negotiating leverage.

National housing inventory reached 1.62 million existing homes in August, representing a 4.9-month supply. That's the highest months-of-supply figure in more than a decade.

That can matter for buyers.

Instead of using every available dollar for the down payment, there may be situations where we can negotiate seller concessions to help with allowable closing costs or structure the financing differently.

This is why the purchase contract and the mortgage shouldn't be viewed as two completely separate decisions.

Your Realtor and your lender should be working together.

There Isn't One “Correct” Down Payment

I've had buyers who absolutely should put 20% down.

I've had others where 10% made more sense.

Sometimes 5% works beautifully.

And for the right borrower, a 3% down conventional loan can be an excellent way to purchase a home without draining years of savings.

We also have other financing options that can provide very low — or potentially no — down payment for eligible borrowers, including VA and USDA financing.

That's why one of the first conversations I like having with a buyer isn't:

“How much house can you afford?”

It's:

“How much money do you actually want to put into this transaction?”

Those are two very different questions.

Don't Wait for a Number You May Not Need

If you've been waiting to buy because you believe you need 20% down, let's at least have the conversation.

You may decide that continuing to save is absolutely the right move.

Or you may discover that you're much closer to being ready to buy than you thought.

Either way, you'll be making the decision based on actual numbers instead of one of the oldest mortgage myths around.

And when you're talking about one of the largest financial decisions you'll ever make, that's a much better place to start.

— Ryan Langley VP, Branch Manager Ruoff Mortgage

Loan programs, interest rates, mortgage insurance requirements and eligibility are subject to change and applicable underwriting guidelines. A 3% down payment is not available to every borrower or transaction. Contact a licensed mortgage professional to review your individual situation.