Insufficient Down Payment: Expert Reveals the Amount First-time Homebuyers Should Prepare
When contemplating future homeownership, many individuals immediately associate it with the daunting task of gathering a hefty lump sum for a down payment. However, the actual amount required may be less than anticipated.
The concept of a 20% down payment requirement originated during the Great Depression when mortgages had shorter terms compared to the current standard 30-year term. Moreover, down payment thresholds were often even higher than one-fifth of the property’s value. Over the subsequent decades, numerous government-backed mortgages stipulated a 20% down payment.
Considering today’s property prices, this figure may appear overwhelming. The median price of a house in the U.S. stands at approximately $400,000, necessitating an $80,000 down payment if adhering strictly to the 20% rule.
According to a recent CNBC Your Money Survey conducted by SurveyMonkey, close to 40% of non-homeowners in the U.S. attribute their lack of savings as the primary reason for not having a down payment. This survey engaged more than 4,300 adults in late August.
However, the reality is that “typical first-time buyers usually have a down payment well below 20%,” as asserted by Jessica Lautz, Deputy Chief Economist and Vice President of Research at the National Association of Realtors. Instead, a more common scenario involves a 6% or 7% down payment for initial home purchases. During Q1 of 2023, the median down payment on a single-family home was 7.5% of the purchase price, as reported by ATTOM, a real estate data company.
Thus, for the average-priced U.S. home, a down payment of approximately $24,000 would suffice.
Better yet, several programs are available that can potentially assist aspiring homeowners in reducing their down payment even further.
Experts highlight various government-backed initiatives, along with offerings from states, financial institutions, banks, and credit unions, that feature less daunting down payment requirements than the conventional 20%.
Some federal programs enable home purchases with minimal or no down payment. Notably, the U.S. Department of Agriculture, the Federal Housing Administration, and the Department of Veterans Affairs all offer programs with low down payment options.
Simultaneously, financial institutions provide alternative solutions. U.S. Bank, for instance, advertises a down payment as low as 3%, while Zillow recently introduced a 1% down payment option in Arizona for eligible borrowers, with an additional 2% contributed by Zillow Home Loans.
Please note that if your down payment is less than 20%, it may be perceived as higher risk for the lender. In such cases, you will usually be required to pay mortgage insurance. The cost of mortgage insurance varies, but typically ranges between $30 and $70 per month for every $100,000 borrowed, as stated by Freddie Mac.