Demystifying the Down Payment: Is 20% Really Necessary for Your California Home?
Think you need 20% down to buy a home? Depending on the financing available and your individual circumstances, you may have other options. Understanding how different down-payment choices work can help you make a more informed decision.
By Sandy Biondo | Consolidated Lenders Group
One of the most common questions I hear from prospective homebuyers is:
“How much do I actually need for a down payment?”
Many buyers have heard that they need to save 20% of the purchase price before they can buy a home.
While putting 20% down can offer certain advantages, it isn't a universal requirement for purchasing a home.
Different mortgage programs have different down-payment requirements, and the right amount for you depends on much more than a single percentage.
Why Does Everyone Talk About 20%?
The 20% figure is commonly associated with conventional mortgages because putting at least 20% down can generally allow a borrower to avoid private mortgage insurance, or PMI, on certain conventional loans.
A larger down payment can also:
Reduce the amount you need to borrow
Lower your monthly principal-and-interest payment
Give you more equity in the home from the beginning
Potentially affect the loan terms available to you
Those can be meaningful advantages.
But that doesn't mean waiting until you've saved 20% is necessarily the right choice for every buyer.
Lower Down-Payment Options May Be Available
There are several types of mortgage programs that may allow qualified borrowers to purchase with less than 20% down.
1. FHA Loans
FHA-insured mortgages can offer lower down-payment requirements for eligible borrowers.
Depending on current program requirements and borrower qualifications, the minimum down payment may be as low as 3.5%.
FHA financing also has its own mortgage-insurance requirements and other considerations, so it's important to compare the entire loan rather than focusing only on the down payment.
2. VA Loans
Eligible veterans, active-duty service members and certain surviving spouses may have access to VA-guaranteed financing.
For qualified borrowers and eligible transactions, VA financing may allow a home purchase with no down payment required.
Eligibility, property requirements, funding fees and other program rules may apply.
3. USDA Loans
USDA-backed mortgages are designed to help eligible borrowers purchase qualifying properties in designated areas.
For eligible borrowers and properties, USDA financing may offer a no-down-payment option.
Income limits, geographic eligibility and other program requirements apply.
4. Conventional Low-Down-Payment Options
A conventional mortgage doesn't automatically mean putting 20% down.
Certain conventional programs may offer qualified borrowers down-payment options as low as 3%, while other options may require more.
When the down payment is less than 20%, private mortgage insurance may be required depending on the financing.
The cost and cancellation rules for PMI vary, so this is another area where it's helpful to look at the complete financing picture.
5. Down-Payment Assistance Programs
Some qualified homebuyers may also have access to state, local or other approved assistance programs designed to help with down-payment and/or closing costs.
These programs can have specific eligibility requirements involving factors such as income, property location, purchase price, occupancy or homebuyer education.
Program availability and funding can also change.
If you're considering assistance, Sandy can help you explore whether there are programs currently available that may fit your situation.
Bigger Isn't Automatically Better
It's tempting to assume:
The larger the down payment, the better the financial decision.
But it's more nuanced than that.
A larger down payment may mean:
✓ A smaller loan amount
✓ A lower monthly principal-and-interest payment
✓ More initial equity
✓ No PMI on certain conventional financing when applicable
✓ Potentially different loan pricing or terms
A smaller down payment may mean:
✓ Keeping more of your savings available
✓ Potentially purchasing sooner rather than waiting to accumulate 20%
✓ More cash available for moving, repairs or emergencies
But it may also mean:
• A larger loan balance
• A higher monthly payment than with a larger down payment, all else being equal
• Mortgage insurance or other program costs, when applicable
Neither approach is automatically right or wrong.
Don't Forget About the Money You'll Need After Closing
This is especially important.
Your down payment isn't necessarily the only money you'll need when purchasing a home.
Depending on your transaction, you may also need funds for things such as:
Closing costs • Prepaid taxes and insurance • Initial escrow funding when applicable • Inspections • Moving expenses • Repairs or improvements • Furnishings
Putting every available dollar toward your down payment may leave very little financial cushion after you receive the keys.
For some buyers, keeping additional money in savings is an important part of deciding how much to put down.
So, How Much Should You Put Down?
There isn't one answer that works for everyone.
Instead, consider questions like:
How much cash do I currently have available?
How much would I like to keep in savings after closing?
How would different down payments affect my monthly payment?
Would mortgage insurance apply?
Which loan programs might I qualify for?
How long do I expect to own the home?
What other financial goals am I working toward?
Once you see how different scenarios affect the entire transaction, you can make a much more informed decision.
The 20% Myth Shouldn't Make the Decision for You
If you haven't saved 20% of a home's purchase price, don't automatically assume you're not ready to explore homeownership.
You may have financing options you haven't considered.
On the other hand, having enough money for a larger down payment doesn't necessarily mean putting all of it into the home is the best strategy for your circumstances.
The important question isn't simply “How much can I put down?”
It's:
“What down-payment strategy makes sense for my overall financial picture?”
Let's Look at Your Options Together
With decades of mortgage and real estate financing experience, Sandy can help you understand available financing options and compare how different down-payment amounts may affect your loan and overall home-buying costs.
You don't need to know which program you want before reaching out.
Start with your goals, your questions and your financial picture—and go from there.
Disclaimer
This information is provided for general educational and informational purposes only and is not intended as financial, legal, tax, or investment advice. Every borrower's situation is different. Loan programs, rates, terms, eligibility requirements, property requirements, and costs are subject to change and may vary based on individual circumstances. All loans are subject to applicable underwriting and approval requirements. Borrowing against home equity creates debt secured by your property and may increase your total borrowing costs. Refinancing may increase the total finance charge over the life of the loan. This information is not a commitment to lend or a guarantee of loan approval. Please contact Sandy Biondo at Consolidated Lenders Group, Inc. to discuss your individual financing needs.
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