Mortgage 101: Debunking the 20 Percent Down Payment Myth

Shaking hands for getting a mortgage

If you’re new to the home-buying process, there’s a lot to learn.

Terms like amortization, acceleration clause and contingencies could just as well be spoken in a completely different language. And escrow. What the heck is escrow?!

Inexperience aside, potential homebuyers likely also have their own notions of homeownership and its prerequisites. And, unfortunately, they may develop some misconceptions along the way.

One of these misconceptions is that a 20 percent down payment is necessary to become a homeowner.

The good news: The 20 percent down payment claim is indeed a myth. In fact, there are many other, lower-cost loan alternatives to consider.

Where Does It Come From?

The 20 percent myth refers to exactly what its name suggests: That you’ll need to pay at least 20 percent of your mortgage loan up-front, no ifs ands or buts about it.

If you’re wondering how this myth came to prominence, you’re not alone. Nevertheless, it continues to rear its ugly head, scaring some renters straight into life-long tenancy.

According to Zillow, the median home sale price in the United States is $230,100. If we apply the 20 percent myth, that means you’d need $46,020 to close on a house. That’s a pretty penny – and one that the average person likely can’t afford given that roughly 70 percent of Americans have less $1,000 in their savings accounts.

To make matters worse, rents in major cities continue to climb. Unfortunately, some renters may be paying more than they have to due to uncorroborated fears of exorbitant loan options.

Alternative Down Payment Options

There are a handful of down payment options that won’t break the bank. Some plans don’t require any down payment at all.

The Federal Housing Administration (FHA) offers loans that require a three-and-a-half-percent minimum down payment. The FHA doesn’t administer the loans, but instead guarantees them to FHA-approved lenders.

The United States Department of Agriculture (USDA) is another option. The USDA is aimed at first-time buyers and doesn’t require any money down. Better yet, the program isn’t just intended for rural homebuyers. Visit the USDA’s site to see if you’re eligible.

The Department of Veteran’s Affairs (VA) also offers zero-down-payment options for qualified service members.

Here at Sunrise Banks, we too provide down payment assistance. Our HomeReady Mortgage Program requires only a three-percent down payment (some restrictions may apply).

Know Your Options

Owning a home is an extremely exciting rite of passage. By spreading misinformation like the 20 percent myth, some qualified loan applicants might lose out on a big opportunity.

For more information on the home-buying process, visit our knowledge center.

Still have questions? Contact a mortgage officer today.