5 Myths About Real Estate Down Payments You May Believe

According to NerdWallet’s “Down Payment Reality Report,” a staggering 44% of potential homebuyers see “a lack of down payment savings” as their biggest stumbling block when it comes to purchasing a home.

This is huge – and it reflects just how much the down payment means to the home buying process. In a lot of ways, your down payment is closely connected to your purchasing power in the short term, and the total amount you will pay over the long. It’s also tied to your mortgage loan in a few crucial ways.

For all these reasons, it’s important that you get your down payment right. So why are there so many myths and misconceptions out there, pointing would-be buyers in the wrong direction?

Ready to approach this important home buying step with greater peace of mind? Let’s break down five common, scary, and totally misleading myths about down payments:

1.) “You Have to Have a 20% Down Payment”

For years and years, a 20% down payment was considered to be the gold standard when purchasing a home.

And, in a lot of ways, it’s still the optimum amount to put down. But it’s far from the end-all-be-all marker that a lot of people still believe it to be.

The reality is that you just don’t need a 15-20 percent down payment in today’s marketplace.  

In fact, consider this: As recently as 2014, one in five borrowers who took out conforming, conventional mortgages put down less than 10 percent, with many paying as little as three to five percent out of pocket. And this is to say nothing of other types of loans, which may require even less. For instance, USDA and VA loans can be approved even with $0 down payments, while FHA loans only require 3.5 percent down.

So, why do so many people still abide by the 20 percent rule? One factor to consider is private mortgage insurance, or PMI. In many cases, PMI is required when a buyer makes a down payment of less than 20 percent. When PMI is applied, you’ll need to factor this interest into your monthly costs, in addition to your mortgage. With that said, these costs can be quite manageable, and most lenders will cancel your PMI once your home equity passes 20 percent.

2.) “You Should Never Put Down More Than 20%”

On the flip side of the same coin, many buyers tend to believe that 20 percent should be the hard limit when it comes to down payments.

But, if it’s possible for you to do so, there may be a lot of benefits to increasing what you pay upfront.

For one thing, a higher down payment may suggest to your mortgage lender that you’re committed and trustworthy, which could result in you getting a lower interest rate on your mortgage. Even better, more money upfront means less money to pay off in the long term. And that means more cash in your wallet every month!

It all comes down to the math. For instance, as investment website The Motley Fool points out, if you were to put down 20 percent on a $250,000 home, with a 4.5 percent interest rate on a 30 year fixed mortgage, you’d pay $50,000 upfront, with a monthly payment around $1013 (not counting taxes or insurance). Increasing your down payment to 24 percent ($60,000) would result in a monthly payment of $963 – a pretty steep drop.

3.) “You Can’t Compete With Cash”

When it comes to buying a home, there is a prevailing belief that cash is king.

To wit, if you were making an offer on a home that was also receiving other offers, one of which was in cash, conventional wisdom says that sellers will go for the all-cash option.

But this isn’t always the case! While it’s true that many sellers will be intrigued by the promise of a cash offer (which typically means a quicker closing, and no potential for setbacks during the loan approval process), this isn’t necessarily true of every seller.

Many sellers are less interested in a quick close than you’d think, particularly if they’re focused on making sure that their home goes to the right person. Many cash offers also come from developers, and some sellers are reticent to give up their family home, only to see it gutted or replaced.

For this reason, many brokers will recommend that buyers write a personal letter to accompany their offer, which could convince the seller to opt for one party over another. In some cases, buyers seeking financing may also be able to put down a higher offer than one that comes in all-cash; sellers may be willing to deal with a longer closing timeline if it ultimately means a higher sale price.

4.) “Your Credit Score Doesn’t Impact Your Down Payment”

When it comes to getting approved for a mortgage loan, a buyer’s credit score can often be a make-or-break piece of the puzzle. But does your credit score have anything to do with your down payment?

While it may not be a deciding factor, your credit score does have a role to play when it comes to your down payment. Specifically, some mortgage lenders may require you to put down a greater down payment if your credit score is less than ideal.

Remember, your lender is looking at you as an investment – and they’re going to weigh all sorts of factors to determine how trustworthy and dependable you’ll be in the long term. A person’s credit is a big indicator of their future reliability. Besides tweaking the amount of your down payment, lenders may also require buyers with low credit scores to accept higher interest rates, which can result in higher monthly payments and more total interest paid over the life of the loan.

The good news? You don’t really need a perfect credit score to purchase a home! In fact, according to data from Ellie Mae, more than 50% of all approved loans came from FICO scores below 750.

5.) “You Won’t Be Able to Use a Down Payment Assistance Program”

There are two big myths that tend to come up around down payment assistance:

  1. It’s extremely difficult to qualify for down payment assistance
  2. Down payment programs are only for first-time buyers

To the first point, the National Association of Realtors (NAR) broke it down in a recent infographic, noting:

“There are assistance programs available for homebuyer with all levels of income, current renters or owners, and buyers with a diversity of credit scores.”

This is important to keep in mind! There are all sorts of local and national programs out there, ready to help people from all backgrounds collect the funds for their dream home. You may need to do some digging to find the right program for you, and it may not always be easy to qualify and secure assistance. But you shouldn’t disqualify yourself before you even get started!

And to the second point? It’s important to remember that down payment assistance is not only available for first homes, but for those “buying their second, third, or tenth home,” as the NAR puts it. While many assistance programs are indeed aimed at first time buyers, this isn’t a blanket rule.

Finally, remember that personal gifts and loans can go a long way toward helping you secure your down payment. According to NerdWallet, among those who have purchased a home in the past five years, one in five Gen X and Baby Boomers used family gifts, along with 14 percent of millennial buyers.

Ready to Get Started?

Curious about what it really takes to buy a home in the Chicago area? Looking for guidance from a real estate team that will always set you down the right path? Real Group RE is here to help!

With decades of combined experience, our team knows all of the ins and outs of the Chicago marketplace, and we love to pass along our expertise, passion, and certified negotiation skills to our clients. Drop us a line today to get the conversation started!

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