There seems to be hesitation these days in answering the question whether or not a homebuyer needs a large chunk of money in order to buy a home. There are many avenues and products available to the home purchaser, many of which
do not require such a hefty downpayment. Often times, in today's market, that's simply not available for many first-time home purchasers. From the
Richmond Times Dispatch, comes advice from their expert broker.
Ask the Broker
By Peter G. Miller
20% DOWN?
Question: We’re interested in buying a home and can purchase with 20 percent down. Would it make more sense to buy with less money up-front?
Answer: There’s no rule that says you have to buy with 20 percent down if you have it, but it’s a choice that lenders love. The logic is: If a home is purchased with 80/20 financing, the lender has a big cushion if something goes wrong. Example: You buy a home for $300,000 with 20 percent down, lose your job, the house is foreclosed and the property sells at auction for $260,000. That’s a loss of $40,000 but to the lender there is no loss. The property sold for $260,000, but the property was financed with a $240,000 mortgage (80 percent of $300,000). The $260,000 from the foreclosure sale allows the lender to be completely paid back.
Buying with 20 percent also has advantages for purchasers. You’ll owe less, so the monthly mortgage payment is smaller. With 20 percent down there’s no requirement for private mortgage insurance, a big savings. If you have some credit dings, a big down payment is likely to be seen as a compensating factor that will make your mortgage application more attractive.
But while lenders like financing with 20 percent down, you may not. It takes a long time to save so much money, a tough job for many. According to a 2016 survey by GoBankingRates.com, most of us— almost 70 percent — have less than $1,000 in savings.
In today’s world buying with 20 percent down is a luxury for most purchasers. According to the National Association of Realtors, in 2016 first-time buyers typically bought with 6 percent down, and repeat purchasers were able to pay 14 percent up-front.
As an alternative to 20 percent down you can readily finance with the FHA and 3.5 percent up-front. VA-qualified borrowers can purchase with nothing down. There are also new conforming loans with just 3 percent down.
Why would you want to purchase with less down if that means higher monthly costs and some form of mortgage insurance?
You might have a better use for the down-payment money such as starting a business or paying off education debt. You might be more comfortable with cash in the bank. Having cash on hand can be important in the event of emergencies. And, while you may be able to buy with 20 percent down, will you then have enough funds for closing, moving and repairs?
VALUE PROPOSITION
Percentage of single-family homes in the U.S. that currently are worth more than they were before the Great Recession.
Article originally appears in RTD Homes Saturday, September 9, 2017 issue.
