When A 20% Down Payment on a House Just Isn’t Happening

Five years ago, my husband and I started saving for a down payment on a house. We had heard it’s best to have 20% of the ball park purchase price before house hunting.

But instead of getting our ducks in a row and then finding the right house, the house found us.

And at the time, our ducks were all over the place.

In fact, we only had about 10% to put down. Plus, even if we did drain our account to scrape together that pitiful 10%, we’d have nothing left over for paint, furniture or window treatments. Hell, we couldn’t even afford to change a light bulb.

In 2016, the average house cost was well over $372k, according to the U.S. Census Bureau. That makes a “sufficient” down payment around $74k. Who has that kind of cash hanging around? We sure didn’t.

If you’re in a similar situation, take heart. Our family survived, and so will yours. Not having 20% isn’t a show-stopper. When you find a dream home that’s in your budget, the penalties you’ll face for not going the traditional route can certainly be cumbersome, but they don’t mean game over.

Let’s take a look at exactly why the “experts” urge home buyers to amass 20% before making an offer on a house. Then, we’ll discuss what life might look like if you screw conventional wisdom and blaze your own trail.

The Dark Side of Homeownership.

The main reason realtors and lenders encourage home buyers to save a healthy 20% is because without it, you’ll pay a monthly insurance called Private Mortgage Insurance (PMI), or its government counterpart. This is usually a few hundred bucks a month, depending on your locale and home of choice. Its purpose is to cover your lender (not you) in case of a default. You don’t benefit from carrying the insurance, although you won’t get a loan without it.

Another reason professionals advise against putting down less than 20% is because lenders use risk-based pricing to determine how much interest to charge you. How do you think a smaller down payment affects that rate? If you answered “unfavorably,” give yourself a point. Mortgage companies aren’t mean, but they are astute. And they’re smart to mull every factor when determining who’s a higher-risk home buyer. It is, after all, their money.

What’s more, a smaller down payment leaves you fewer options if you decide to sell in a few years. You see, once you enter the market, your investment starts producing returns almost immediately in the form of equity. In other words, once you have a piece of real estate, you’re (all but) guaranteed to make a profit just by hanging onto it. And the more money you put into it at first (“down payment”), the more equity you’ll have. On the flip side, if you’re putting just a few thousand bucks down on an average-priced home, you won’t be able to sell it for much of a profit, if any at all.


The Bottom Line

So what’s your goal? Are you serious about staying in this new dream home for a while? Or is this a quick fix because you’re sick of renting/all your friend are doing it? Have you proven your ability to make on-time payments and restrain the natural impulse to spend frivolously? If so, jump in.


How to Make it Work

After determining your comfort level and risk tolerance, your next question will be “The How.” Knowing how to buy a house without 20% is simple, but it depends on your situation. If you own a home now, you could simply write a contingent offer on your dream home with the promise of using your current equity as a down payment. If, on the other hand, this is your first purchase, plan on choking down the monthly expense of PMI and higher interest. Another option is to obtain an FHA Loan from the Department of Housing and Urban Development, a long-term alternative that comes with its own drawbacks.


Our Story

Remember the house that found us? We nabbed it. We put 8% down and swallowed the bitter PMI pill each month. But there was a gamechanger: That frustrating insurance payment benefited our family by motivating us to save money more aggressively. If we wanted to have lunch out each day, we could afford it, sure, but knowing it would delay shaking off that $280 monthly payment made a brown bag much more appealing. In other words, PMI pushed us to save in other areas we wouldn’t have otherwise.

And it might have the same effect on you.


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