Buying a home can be one of the biggest and most exhilarating purchases of your lifetime. Especially in a time when young people are having more difficulty locating affordable housing, finding yourself in a situation where you think you have finally saved up enough money for a down payment on your first home can be a huge milestone, but it can also bring up a lot of questions.
There can be times when simply figuring out how much money is required for a downpayment on any given loan program can put you into a tailspin. Though there are generally traditional numbers that many people stand by, there are many reasons to wonder if these guidelines still apply.
If you’re ready to buy your first home, you’ve likely heard that a 20% down payment on a mortgage has been the traditional standard. Generally speaking, putting 20% or more down on your new home can help lenders to view you as a less risky borrower, which may ultimately help you get a better deal on your loan terms.
But given that as of January 2020 the median home listing price was the U.S. is nearly $244,054, according to Zillow , 20% can be a substantial chunk of change for most people.
But is the 20% down sage advice or an opinion that’s no longer relevant? In the 2019 National Association of Realtor Profile Report , first time homebuyers financed 94% of their home and repeat buyers financed 84% of the purchase price. So, it seems that times are a changin’.
This article will review different loan programs and down payment options to hopefully provide clarity and demystify how different down payment options can impact your mortgage choices. These tips may help you better identify the loan programs that best fit your financial scenario to help put you on the road to owning your own home.
Why Does a 20% Down Payment Seem like the Magic Number?
private mortgage insurance (PMI). PMI benefits the lender in case of loan default which can cost anywhere from 0.140% to 2.33% of your total loan amount annually depending upon many factors.
Don’t confuse Private Mortgage Insurance (PMI) with FHA’s Mortgage Insurance Premium (MIP) which is government loan insurance, not private loan insurance.
And then there’s the most obvious perk: putting more money down up front means that you’ll owe less, which normally equates to lower monthly mortgage payments and less interest charges over the life of the loan.
But let’s face it: Even if you’re making a decent—heck, a pretty awesome—salary, saving up 20% of the total cost of a home can be difficult, especially if you’re paying rent, juggling student loans, and trying to reach other long-term goals, including saving up for a retirement. Today, it can seem that the goal of owning your home is close to impossible.
But think again.
There may be some very valid reasons why it might just be more beneficial for you to put down less than 20% on your dream house. Again, it will depend on your exact financial circumstances and long term goals, but it could be worth considering the following:
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
Preserving Your Nest Egg
Putting 20% down on a home might force you to rely heavily on funds you’ve worked hard to save, liquidating these funds, even for an investment, may not always be in your best interest.
Given the financial circumstances many people find themselves in, allocating a big chunk of change to put towards a house before you’ve covered your other important life expenses—such as an emergency fund, saving for retirement, and other important long-term financial goals— may not be the most prudent option for you in the long run.
Remember, you may be able to borrow money to pay for school, to buy a new car, and to buy a home, but you definitely can’t borrow money to pay for your retirement. So you may want to consider alternatives before you dip into your savings. And if there aren’t any other options available, you may want to check that all of your other financial bases are covered.
While you can withdraw qualified funds up to $10,000 from a traditional or Roth IRA without penalty to buy your first home, there are still taxes to consider.
With a traditional IRA, you have to pay taxes on the amount you withdraw, but with a Roth IRA, no taxes will be due if you’ve had the account for at least five years. This strategy could help you in the long run, especially if you expect income boosts as you make strides in your career.
If you are considering putting other financial goals on hold in order to buy your home, it might make sense to take a step back and look at your overall financial profile. This could help you see what makes the most sense for your circumstances. Our in-depth home buyers guide extensively covers such topics.
To be sure, there’s no hard and fast rule about how to manage your money since everyone’s situation is different. But if you’re considering buying a home, it is a good idea to find out how much home you can afford before starting the process. In addition, if you aren’t sure how to prioritize your other financial needs, taking the time to assess your unique situation could help you make the decision that satisfies your priorities now—without sacrificing the wellbeing of your future self.
Your Other Big-Ticket Goals Won’t be in Limbo
Veterans (VA) loan which allows for 100% financing? Or a First Time Homebuyer loan which may allow for as little as 3% down .
Putting down a smaller down payment could allow you to get in the housing market if you live in a popular city where you pay high rent or where home prices have soared in recent years.
Renting in the Bay Area? Lower down payment options on a new home could be a path to homeownership. And just like when searching for the perfect home, when it comes to landing on the right loan program and down payment percentage, you’ll likely want to shop around in order to find your best fit—there’s no one size fits all.
So, no matter where you find yourself currently in your home-buying journey, it’s recommended to do your homework and weigh all the pros and cons to choose what works best for you.
Eager to get a jump on the home-buying process? Discover your potential rate on a SoFi mortgage loan in less than two minutes.
We’re on your side to put you in your dream home with down payment options of as little as 10% on loan amounts.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’swebsite .
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.
SoFi Home Loans
Terms, conditions, and state restrictions apply. SoFi Home Loans are not available in all states. See SoFi.com/eligibility for more information.
MG18113
Source: sofi.com