What Are Some Down Payment Misconceptions?

When the time has come to buy a home, there’s no doubt the pressure is on since it can be one of the most important financial decisions you’ll ever make. But, like many other soon-to-be-homeowners, you may be held back by a few misconceptions–particularly myths about down payment requirements.

As with most myths, reality can be quite different, and here we’ll break down some of these “myths” so that you have more knowledge on hand during the home search.

Myth 1: It Takes 20% Down to Buy a Home

The reality? Putting down 20% means you won’t have to pay private mortgage insurance (PMI) while also lowering your monthly payments, but it’s not required. There’s several loan programs that allow significantly lower down payments, such as:

• FHA: Just 3.5% down is required for FHA loans, as long as your FICO score is 580 or higher.
• Conventional: Some lenders will take as little as 3% down for qualifying first-time homebuyers.
• VA: If an armed forces veteran, and you meet the criteria, you may qualify for zero down through the VA loan program.
• USDA: More for homebuyers in rural regions, USDA loans offer zero down as well.

If paying 20% down is keeping you from buying a home, it may make sense to explore other financing options available. With a seasoned realtor on your side, you could potentially negotiate seller credit, which may help cover some down payment costs. 

Myth 2: The Bigger the Down Payment, the Better

Although putting down a bigger down payment may reduce monthly mortgage payments and cut out PMI, it may not always be the best move. If putting down a lofty sum will drain your savings, it may leave you financially vulnerable, too. The thing to remember is that many sellers take other factors into consideration than just cash when choosing an offer.

When it comes to closing on a home, can you do so quickly? Cash might be king, but some sellers may be open to VA, FHA, and other conventional loans with reliable, solid backing. Then there’s contingencies–are you agreeing to waive repairs or inspections to make the offer a sweeter prospect? 

Myth 3: Using Gifted Money or Assistance Programs Aren’t Allowed

Some first-time homebuyers are under the impression they must tap into savings or other assets to make the down payment alone, but that isn’t the case. Many loan programs allow gifted money from family or friends to fund a down payment. There’s also Down Payment Assistance (DPA) programs where grants or low-interest loans are available for first-time buyers.

401(k) or IRA withdrawals are also other avenues you can take, albeit with some added risk of coming out of a retirement account, but it’s a way to go if other options are slim to none. Basically, there’s alternatives to having a huge nest egg saved up, and you may still be able to get into a home quicker than you may think! 

Myth 4: Renting Is Cheaper Than Buying a Home

Saving for a big down payment on a house can seem like an insurmountable task for a lot of people, taking years to achieve, making renting a seemingly better choice. But with both home and rental prices increasing, owning a home may actually be more affordable than renting in some markets.

When renting, it may be marginally cheaper, sure, but what’s really being paid for? Basic shelter, convenience–but when buying, you’re investing in an asset–equity. When paying for a rental, there’s no building of equity or return on investment, only the paying for a service, and in some cases not much cheaper than buying a home.

Myth 5: Let Mortgage Rates Drop Before Buying

One of the biggest misconceptions for some buyers is that they must wait for lower rates before buying a home. The trouble is, timing in an ever-fluctuating market is all but impossible, and waiting could mean a missed opportunity. Instead, consider why buying now may be the best bet:

1. Prices might continue rising; waiting only makes it more expensive.
2. If rates drop later on, you can always refinance at that time.
3. Sitting on owning a home could be missing out on a chance to grow equity.

Maybe you’ve already found a home that’s within your budget and needs–then it’s probably best to buy now rather than deal with higher prices and competition in the future.

Get the Right Advice from an Expert Realtor Today!

Making a down payment on a new home shouldn’t be too complex, and if you’re ready to see what options work best for you, connect with a Realtor in Encinitas who can guide you through the ever-changing market and zero in on the best financing solution for you.

Reach out to Realtor Linda Moore if you’d like to explore down payment options that fit your unique financial goals today!