How to Avoid Mortgage Junk Fees© Solis Images / Shutterstock.com
Saving up enough for a down payment is often a financial barrier that stands in the way of homeownership. Being able to put a 20% down payment on a home can seem impossible for some — but is it now OK to put down less? Or have down payment requirements actually gone up due to a competitive housing market?
40% of Buyers Put Down 20% or Less on a Home The survey found that 40% of recent buyers put down less than or equal to the standard 20%. Here’s the complete breakdown:
4% put 0% down
15% put 1%-10% down
21% put 11%-20% down
That means that the majority of recent homebuyers (60%) put down more than 20%.
19% put 21%-30% down
12% put 31%-40% down
10% put 41%-50% down
9% put more than 50% down
10% paid all cash
Lower Down Payments Are Becoming More Commonplace as the Market Cools It’s worth noting that this survey was conducted in July, and since then, the market has continued to cool. During the peak of the sellers’ market, it would be difficult to get an offer accepted if you put less than 20% down, but as the market cools, buyers can get away with lower down payments, said Matt Greer, a real estate agent in the Phoenix market. “A few months ago you had to put down a lot to even get your offer looked at, but now you can get by with far less down simply because the market has shifted,” he said. “Rather than buyers working to please a seller, sellers are working to please buyers. This means that you can put less down and the sellers will take it because it might be the only offer. You can also put down less earnest money for the same reason. A few months ago sellers wouldn’t even look at FHA loans because they believed there is more risk involved, but now they’d line up for a buyer with an FHA loan. Same with VA loans.”
The Median Down Payment Is Now 13%
“Contrary to popular belief, it is a myth that you’re required to put 20% down to purchase a home,” said Ashley Moore, community lending manager with Chase Home Lending. “Some home loans may require far less of a down payment — between 3-5% — and the industry average is typically within 6 and 8%. According to the National Association of Realtors, the median down payment in 2022 is 13%.”
However, as interest rates continue to rise, down payment amounts likely will, too. See more in these slideshow videos - The Home Buying Process and Tips for First Time Home Buyers.
“I am seeing some buyers put more money down now that rates have increased substantially as a way to keep their payment comparable to what it was before increased financing costs set in during the second half of 2022,” said Ian Katz, a licensed associate real estate broker with Compass in New York City.
The Pros and Cons of a 20% Down Payment
Even if you don’t need to put down 20%, there are advantages to aiming for this number.
“Putting 20% down gives you more equity in your home, eliminates the need for private mortgage insurance and lowers the total amount that you finance,” Moore said.
It will also be beneficial if you end up needing to sell your home sooner than expected.
“A consequence of not putting 20% down is in the case you have a life change and need to sell or refinance, you might not have enough equity to pay all of the costs associated with that sale,” Moore said. “If you plan to be in a home for five years and a life event happens and you need to sell the property, you likely won’t have enough equity to sell without coming to the table with money. In other words, when you put more money down you have more cushion to withstand market fluctuations and their impact on the value of your home. In this same scenario, if you put less money down, you could potentially lose the equity you’ve accumulated.”
Plus, a 20% down payment (or higher) makes your home offer more appealing to the seller.
“A larger down payment usually puts you in a better negotiating position with the seller, as they’ll know that you’re more serious about buying the home and that you have the financial means to do so,” said Rinal Patel, a licensed realtor and co-founder of We Buy Philly Home. “In a market where there are multiple offers on a home, a larger down payment may also help your offer stand out from the rest.”
But, if a 20% down payment isn’t actually affordable for you, it likely is not worth it.
“You may be ‘house poor’ if you don’t have any savings left to pay other expenses or deal with emergencies,” Moore said.
It’s also not a great idea to put down 20% if this means you have to dig into your long-term savings.
“If a large down payment means you can’t contribute to a retirement fund like a 401(k), that’s an investment in your future that you can’t make up later on,” said Judy Dutton, executive editor at Realtor.com. “This is why homebuyers shouldn’t get too hung up on making a large down payment, and make sure they aren’t short-changing other important financial goals such as an emergency fund or retirement.”
How Much Should You Put Down on a Home?
Typically, the more money you put down, the more competitive your offer will be — plus, the smaller your loan (and therefore interest paid) will be. But there is no one-size-fits-all answer when it comes to figuring out your ideal down payment.
“The amount of money you should spend on a down payment depends on your situation,” Moore said. “Putting less than 20% down on your home may be a good idea if any of the following situations apply to you: You have a good household income but haven’t had time to save up for a down payment; a large down payment will almost completely deplete your savings; or a large down payment is the only thing preventing you from buying a home. Prospective buyers can use online tools, like an affordability calculator, to help determine how much down payment they can afford.”
It’s also important to keep in mind that buying a home involves more money out-of-pocket than just the down payment, Moore said.
“Closing costs are used to pay for items such as appraisals, inspections and much more,” she said. “These can amount to up to 3% or more of the final purchase price.”
To figure out how much you should put down, consider your income versus saving ratio, said Eyal Pasternak, a real estate investor and the founder of Liberty House Buying Group.
“For example, if you have a high savings balance but low income, making a large down payment will be good since your monthly payments will be lower, and vice versa,” he said.
All real estate is local. In order to make confident real estate decisions, we believe it is important for you to have timely and neighborhood-specific information. If you would like more information about buying a home in NC, our experts at EXP Realty are here to help. Contact us today to speak with a EXP agent about buying homes or land in North Carolina.