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The Myth of the 20 Percent Down Payment. What You Should Know.

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Repeat after me: you don’t necessarily need a 20 percent down payment to purchase a home.

In the 35 year history of NAR’s Profile of Home Buyers and Sellers – the longest-running survey series of national housing data – the average median down payment has been 5 percent for first-time buyers.

Yet, when asked in this quarter’s Housing Opportunities and Market Experience (HOME) survey how much of a down payment is needed to buy, there appears to be quite the misconception. Knowledge of low-down-payment mortgage options was scarce across all ages, income brackets and education levels. In fact, fewer than 20 percent in each group indicated that they need 10 percent or less to finance their home purchase.

Of course, every buyer is different and perhaps the disconnect is from consumers not knowing their options until they visit a lender. However, creditworthy prospective buyers should know that many lenders now offer safe, sustainable loans with as little as 3 percent down. Even better news? Obtaining a mortgage isn’t as difficult as it was in the immediate years after the downturn.

Here’s some friendly advice for those considering what most buyers actually do: buy a home with less than a 20 percent down payment:

1. Review your financial situation and personal savings to determine how much you can comfortably use for a down payment.

2. When deciding how much of your savings to use, make sure this includes still having enough money set aside after the home purchase for unnecessary expenses and emergencies. A savings reserve of at least 3-6 months is ideal.

3. Visit a few lenders and seek a mortgage preapproval to determine how much money you’re actually qualified to borrow.

4. Find a Realtor® and have a discussion about your budget. This will help a Realtor® hone in your search and only show you available homes in your price range. A Realtor® can also recommend a few financial institutions to reach out to for a preapproval and when you shop around for the best mortgage rate (see #3).

5. Putting less than 20 percent down means you’ll likely pay mortgage insurance (PMI). This is typically paid monthly and is 0.5 percent to 1.0 percent of the entire loan amount on an annual basis. Assuming 1 percent PMI, this comes out to roughly $83 each month on a $100,000 mortgage.

6. Consider all costs to owning a home, not just the mortgage payment. Property taxes, homeowners insurance, potential maintenance and likely homeowners association fees are all homeownership expenses.

7. Rely on professional help from the experts. This includes a Realtor® and your lender. The U.S. Department of Housing and Urban Development (HUD) also has a state-by-state resource guide of homeownership and  home buying assistance programs in your state.