Why a 20% down payment isn’t necessary

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20 percent downpayment

20 percent downpaymentIt’s one of those bits of commonplace financial wisdom that everybody “knows”: You should save up enough money to make a 20% down payment on a house.

For many would-be homeowners, though, saving up 20% for a home payment is difficult. According to report from the U.S. Census, the median value of a home — adjusted for inflation — almost quadrupled from 1940 to 2000. In 1970, according to the data, you could buy a home for $17,000 (or $65,300 in dollars inflation-adjusted to the year 2000). Saving up for a 20% down payment meant saving up the equivalent of $13,060. When you think about it, it seems doable. Set aside $544.17 a month for two years, and you’re set.

Fast forward to today. Even though inflation has an even bigger toll in the years between 2000 and 2015, you can still see the issue when you look at the current situation. For the second quarter of 2014, the National Association of REALTORS reports the revised median home price in the United States as $212,000. That means that a 20% down payment would require that you save up $42,400. That’s a much bigger down payment than what you would expect to pay even 15 years ago — and wages haven’t been able to outstrip inflation.

When you consider that it would take you about six and a half years to save up enough for a down payment if you could only set aside $544.17 a month (or you’d have to set aside $1,766.67 a month for two years), the idea of a 20% down payment seems hopeless, especially when you consider that many expect things to keep picking up in the coming year or two.

But do you even really need a 20% down payment to buy a home?

The reality is that you don’t. Many would-be homebuyers get hung up on this rule of thumb, and despair. However, when you look at the programs available to homebuyers, it becomes clear that a 20% down payment isn’t necessary.

Federal government programs: FHA, VA, USDA

Government programs make it possible for you to buy a home without making a 20% down payment on your home. Here are three programs that you can use to help you buy a home:

FHA: When my husband and I bought a home a little more than seven years ago, we used the FHA home loan program. At the time, the down payment requirement was lower than it is now. However, it’s still a pretty low down payment program. Down payment requirements are as low as 3.5%. So, with our example of a $212,000 home, you would need to save up $7,420. That seems much more doable than trying to save up more than $40,000. Explore FHA mortgage options at Quizzle.

VA: Current and former military service members can benefit from the VA loan program. With this program, might not need a down payment at all. If you are eligible for a VA home loan, it might be a good option for you, depending on your situation, and the interest rate you can receive.

USDA: Even the USDA has a home loan program. When we sold our home last fall, the buyers used a USDA home loan to complete the purchase. Eligibility for this program depends on the location of the purchase, and there might be income requirements that are a bit stringent. However, with this program, you don’t need a down payment. It’s important to understand that these federal home loan programs don’t involve borrowing from the government. Instead, the government guarantees the loans so that lenders are willing to take a chance on you. There might be insurance fees involved, but these can often be rolled into the loan total. Even though rolling these fees into your loan is convenient, it’s important to understand that it increases your overall cost.

Conventional loans: you might not need 20% anyway

In many cases, even though lending standards have tightened since the recent mortgage market crisis, it’s still possible to get a home loan for less than 20% down. Regulators do not enforce any sort of minimum down payment, even though a recent overhaul to lending rules originally considered including such a requirement.

According to realtor.com, it’s common for lenders to accept a payment of 10% down, and some lenders will even accept 5% down — as long as you are buying your primary residence. As a result, it’s still manageable to save up for a down payment, even if you aren’t taking advantage of a government program.

However, the bigger the down payment, the better off you are financially. When you have a larger down payment, you borrow less, and pay less in interest. You also avoid the possibility of paying private mortgage insurance, which can add another overall cost to the loan. It’s also important to carefully evaluate how much home you can afford. Just because you don’t need a big down payment to purchase a home doesn’t mean that you should go bigger just because the bank tells you it’s a possibility.

If you really think you are ready to buy a home, but have been daunted by the thought of a 20% down payment, you can rest a little easier. You might not need to save up as much as you think.

Click here to check out all of Quizzle’s Home Loan offers.

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Miranda is a freelance writer and professional blogger specializing in financial topics. Her work has appeared in numerous media, online and offline. Her blog is Planting Money Seeds.