There are many misnomers in mortgage lending, but none as specious as the requirement of a 20% down payment to buy a home. According to the latest survey from the National Association of Realtors, many potential home buyers disqualified themselves from buying, without even attempting to look at houses, because of their lack of funds for the “required” down payment. Yet, according to the survey, over 54% of all of 2017 home buyers, and as much as three-quarters of all first-time buyers put less than 20% down when purchasing their homes.
It’s no surprise that with rents rising, more and more first-time buyers are taking advantage of low down-payment mortgage options to secure their monthly housing costs and finally attain their dream homes. What is surprising still, is the number of people who aren’t aware of all of the flexible and worthwhile products out there that permit down payments as low as 3% with marginal impact to an overall mortgage payment. The reality of the new realty market is that the average first-time home buyer put down less than 6% on their home purchase in the first few months of this year.
I am not here to advocate or encourage people to thoughtlessly and recklessly buy a home when they are not financially “ready,” but I am certainly here to say it’s possible for those cases where it’s warranted and sensible. Case in point, I recently helped a first-time home buyer buy a home when he was on the fence for months about his ability to afford “anything reasonable.” His family was bursting at the seams in a small two-and-a-half-bedroom apartment, but his attempts to find a home that was affordable given the down payment and costs were going to leave him with no funds after closing.
The uncertainty and depletion of ‘years of savings’ made the home search undertaking daunting and depressing. He kept lowering his potential home price ranges and consequently kept seeing worse-and-worse homes - either requiring extensive work, or houses completely outside his geographical comfort. His realtor was a sympathetic and patient agent who was working with him for quite some time. His agent encouraged him to call me to discuss his finances and see if there was anything creative or alternative that I could suggest.
As I tell all my clients, there is a vast difference between “qualifying for a mortgage” and “affording a mortgage,” and it is my role to help them realize and achieve both aspects of that equation. In this case, he was qualified for a mortgage without question, but it was true that he would be left with no cash after he bought a home in the price range he desired. That said, this was only the case if he put down the full 20% down payment that they had been projecting all along.
He was trusting enough to present his entire financial picture to me and permitted me to run his credit. I noticed several credit card bills with considerable balances that I learned was something he had been carrying for several years. In evaluating the monthly payment, it was my firm belief that he would be in a more financially beneficial position to buy the “dream home” he was considering with a minimum down payment, despite the mortgage insurance. Furthermore, I recommended that he use a portion of his remaining funds to pay off his credit card balances in full. The net result was a new monthly reoccurring payment which was significantly less then he projected with the twenty percent down while maintaining a savings reserve of six-months’ worth of payments.
I was so humbled and honored to share in his recent celebration at his home closing when everything came together perfectly! If you are one of the many first-time buyers who are unsure of whether or not they would qualify for a low-down payment mortgage, consult your local mortgage professional to get the real “low down.”
By Shmuel Shayowitz