Why Do People Say You Need 20 Percent Down for a Mortgage?

If you’re looking to invest in a home of your own, you might have heard that you need to put a 20 percent down payment on the purchase price to secure a loan. In fact, average down payments historically have been well under 20 percent for homes at nearly all price ranges. Read on to learn why the 20 percent down payment rule is a myth and how down payment assistance can help you afford the best property for your needs and your budget.

The truth about the 20 percent down myth

Why do many people stress that you need 20 percent down for your mortgage? It’s not because financial institutions won’t agree to financing otherwise; it’s actually because you’ll avoid paying mortgage insurance. Private mortgage insurance (PMI) is usually required in situations where buyers need to put less than 20 percent down on a house. It’s an extra charge on your mortgage bill, and for typical buyers it can amount to a few hundred dollars every month. Obviously, this is no small figure, and many home buyers want to avoid this charge as much as possible.

There are some benefits to paying mortgage insurance, though, especially if it means it gets you into a home sooner. You’ll have to weigh the costs versus the benefits. Discuss all concerns with your realtor to determine whether you should pay the mortgage insurance, wait to buy a home when you have enough for a 20 percent down payment or determine whether you should dip into your savings to cover the cost. Of course, you sometimes have the option to receive down payment assistance as well.

Down payment assistance options

There are some generous down payment assistance programs to help home buyers secure the financing they need to get into a home and reduce the money they need to save for a down payment. They include:

  • Grants: These are the most common forms of down payment assistance, and they’re gifts that never need to be repaid. The amount you can secure for a grant depends on where you want to buy.
  • Second mortgages: You can take out a loan to cover your down payment, and it needs to be paid down alongside your main mortgage.
  • Second mortgages (deferred): In some cases, you can secure a second mortgage with deferred payments that only need to be paid when you move, sell or refinance the property.
  • Second mortgages (forgiveness): Some second mortgages can be forgiven after a set number of years. In most cases it’s five years, but in some it can be as high as 20 years. You’d only have to repay the second mortgage if you move, sell or refinance the property.

You also have the option of receiving “gift” funds from generous relatives or friends. You need a paper trail showing that the money came from an “acceptable source,” as well as a gift letter from the giver indicating their relationship to you and intent to use funds for your home purchase.

If you’re looking to avoid paying mortgage insurance but need help coming up with a sufficient down payment, a seasoned realtor can inform you of your options for down payment assistance programs. Contact Carpenter Real Estate to learn more about your financing options when buying a home.