Unlocking Homeownership: The Surprising Truth About Down Payments!

So you’re thinking about taking the plunge and buying a house? Do you need to get past the thinking stage and get to the action phase? Does the term “down payment” strike fear in your heart?

When people start the home buying process, many get hung up on the down payment part of the equation. The old adage of needing 20 percent of the purchase price is no longer the case. The “low down” on the down payment is just that.

Case in fact: In 2021, the National Association of Realtors found the average down payment on a house or condo was just 12%. For home buyers aged 30 and under, that number drops to 6%.

Many times, people can actually buy a house for just 3 to 4 percent.

Yes, you read that correctly — 3 to 4 percent! If you’ve been thinking you need to keep saving for the next few years, that may not be necessary anymore.

In 2021, the National Association of Realtors found the average down payment on a house or condo was just 12%. For home buyers aged 30 and under, that number drops to 6%.

Everyone’s financial situation is different so it’s important to meet with a lender to determine your options. Getting pre-approved for a loan is the first step and it usually takes less than an hour. There is no cost involved and it will make the home buying process move along much more smoothly. The worst-case scenario is you may have to wait a while before you can qualify for a loan. But, you’ll know where you stand financially and will know how much of a down payment you’ll need and what you have to do with your budget in order to be approved for a loan.

With interest rates still historically low, and rental prices skyrocketing, it’s an excellent time to start looking for a place of your own.

Low Inventory Means it’s Time to Get Creative

It’s been a sellers’ market in the Denver area for well for 5 years now. Home inventory is at an all-time low and prices have increased dramatically. But it’s not all doom and gloom for potential home buyers. As evidenced by the number of closings each month, people are still successfully finding homes to buy.

If you’re like most people, you’ll need a loan to buy a home and that requires a down payment, which will dictate what your loan looks like. You’ll need to have a good understanding of your finances and savings plan when meeting with a lender. The qualification process will require documenting your income, any gifts that family or friends might provide, tax refunds, and also your expenses (credit cards, car loans, student loans, etc.). Your credit score will also be evaluated so you may want to know that ahead of time. Keep in mind in order to qualify for a conventional loan you’ll need a score of 620 or higher. However, there are other loans available for people who don’t meet the 620 thresholds.

One of the challenges facing millennials, and the GenX group for that matter, is taking that first step from renting to actually owning a place of your own. With rents being so high, many elect to live at home with their parents or take on roommates in order to save enough money for the down payment. If you’ve just graduated from college, it’s not too early to start thinking about homeownership and saving money over the next couple of years to achieve that goal.

Home Ownership Across the U.S. is at a Four-Year High

According to Statista, the current rate of homeownership in the U.S. is at 65.5%. The increase has largely been driven by younger buyers, specifically millennials. The article states, “… Most millennial renters plan to buy a home in the near future. This suggests that homeownership will remain important in the future, as millennials are forecast to head most households over the next two decades.”

It appears that millennials believe that owning a home is a good financial decision and that sentiment is echoed by Dave Cook, mortgage lender with Celebrity Home Loans.

“Millennials believe homeownership is still part of the American dream,” he said. “What often keeps millennials renting longer and out of the home buying process is the belief that you have to have 20 percent down to buy. I often see news coverage stating that people need 20 percent down and it causes many people to believe it and not investigate further.

“I believe if we can spread the word that you can buy with three percent down, we will be able to help many of these young folks much sooner. Once people graduate college, we tend to see it take them about one- to two years to save the down payment unless they are able to get a gift from their family to help out.”

Determine What Kind of Home, Down Payment is Best for You

In discussing homeownership, most people think of single family structures. However, in Denver’s hot market, there are other options, i.e. townhomes and condominiums.  Many young people prefer the latter, regardless if they are single, married or living together.

Townhouses, duplexes, row houses, and condominiums require less upkeep and are generally less expensive to purchase. Once you have a clear picture of your financial picture, you’ll want to decide what type of home best fits your lifestyle. From there, you can determine the best down payment.

Pros and Cons of a Large Down Payment

Keep in mind, the down payment will dictate what type of loan you’ll be eligible to receive and what your monthly payment will be. The larger the down payment, the better the interest rate and terms of the loan, and the lower your monthly payment. You’ll also benefit from not having to pay PMI, which is the monthly insurance a borrower must pay if putting down less than 20 percent.

But remember, putting down a large down payment may compromise your ability to pay for necessary home improvements, repairs and other issues that come up down the road. Determine whether you can afford to have a large amount of money tied up in your home vs. having extra cash. Also, by waiting and trying to save for a 20 percent down payment, you may be missing out of home buying opportunities that won’t exist in another year.

Also, it’s important to recognize there are other financial obligations that come with being a homeowner. You’ll have to budget for property taxes, home owner’s insurance, and possibly an HOA fee. And, you may be thinking about starting a family and saving for retirement which all impact your monthly budget.

Help is Available for a Down Payment

The Colorado Housing and Finance Authority is an organization that provides help with down payments. Homebuyers using one of the CHFA’s first mortgage loan programs to finance their home purchase are eligible to use assistance options to help with down payment and/or closing costs. Even if you contribute towards a down payment, you may still use one of the options. For example, homebuyers can receive:

• Up to 3 percent of your first mortgage (for a 30-year fixed rate loan).
  (Example: Get up to $6,000 on a $200,000 mortgage)
• No repayment required

In addition to the above programs for low- to moderate-income individuals, there are also more basic loans that your lender can discuss with you.

“Fannie Mae and Freddie Mac are conventional loans, and have down payment options for as little as 3 percent down for first time home buyers,” Cook explained. “FHA loans start out at 3 1/2 percent down. These loans are great for people with credit issues because the guidelines are much more forgiving.

“Jumbo loans have down payments as low as 10 percent down but ideally you will want to do 20 percent down on these loans to get the best interest rate. VA loans are amazing and can be done with no money down and no mortgage insurance. USDA loans also are another no money down loan and have great rates. However, the home must be in a qualifying USDA zone area.”

So make an appointment with a trusted lender and see where you stand. And don’t let the down payment get in your way.

(Editor’s note: This blog was originally published in September 2016. It has been revised and updated).