Twenty percent is often considered a standard down payment on a home. However, this amount isn’t realistic for many of today’s homebuyers—especially first-time homebuyers. In fact, 5 percent is a typical down payment for many first-time buyers.1 Even those who aren’t first-timers are opting for closer to 14 percent down.2
Is 20 percent realistic for you?
The idea of paying 20 percent down on a home has been ingrained in our culture. But even for those homebuyers who can afford a down payment of 20 percent, paying less upfront can free up funds for some of your other priorities, such as saving for retirement or paying off student loan debt.
“While you do not need 20 percent, there are certainly benefits to putting 20 percent down if you’re able to do so. One of these benefits is avoiding a monthly private mortgage insurance payment, which makes your monthly payment higher,” says Gannon Walsh, loan officer with SunTrust Mortgage.
“You also want to have cash to cover other expenses involved with buying a home, or to maintain a comfortable emergency savings account," says Walsh.
Consider alternate down payment sources
It can take a long time to save for a house, but there are options available to help you reach your goals, such as accepting a gift from a family member or friend, or using a down payment assistance program.
Did you know that 20 percent of homeowners have accepted a gift from family or friends for assistance with a down payment?3 If you have this as an option, you’ll need to make it official with a gift letter, which should include information such as:
- The amount of the gift
- The address of the home the potential buyer wants to purchase
- The donor’s name and contact information
- The relationship you have with the donor (such as parent, grandparent or friend) and their signature
- A statement indicating that the money is actually a gift and not a loan
“Gifts are a great opportunity for people who are just starting off to be able to get into a home,” Walsh explains. “An important thing to note is that it’s not something that needs to be paid back. A gift letter confirms that the money does not require repayment.”
Another place to look for funds is a down payment assistance program, which can help cover down payments, closing costs and other fees. There are more than 2,500 of these across the country—typically offered by state housing finance organizations and local housing authorities—and can include loans, grants and tax credits. Even better: These assistance programs can often work hand-in-hand with affordable loan programs, such as FHA or VA loans.
Just like affordable loan programs, you first need to qualify for down payment assistance. A little research can help you determine if you may be eligible. “There are usually income limits that can vary by location, state agencies, local communities or counties,” notes Walsh. You may wish to speak with a loan officer, who will be familiar with available programs in your state or region.
“A loan officer is the right place to start, as you consider all of your options,” Walsh says. “He or she can provide a sense of which program might be best suited for the buyer.” They can also help you understand everything your loan may entail, so that you can go through the home buying process with confidence.
Regardless of what down payment percentage you settle on, you’ll need to have that money available at closing. Starting out with a plan of how much home you can afford should be your first step in the house-hunting process.
Owning your home is a great way to build equity and put yourself in control of a tangible investment. If 20 percent down isn't right for your budget, know that you can still reach your homeownership dream.