FYI: You Don’t Actually Need 20 Percent Down to Buy a Home

published Oct 30, 2019
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In honor of risk month, we want to dispel the myth that you have to be perfect in order to be a homeowner (perfect credit, perfect finances, perfect life). So we’re sharing stories about Millennials who took “risks” in order to become first-time homebuyers. While it may not be right for everyone, there are definitely some people who will find the rewards outweigh the potential risks. Interested in reading why Millennials may be so risk-averse to homeownership? Read “You May Never Feel ‘Ready’ To Buy a Home—Here’s Why That Shouldn’t Stop You.

Nicholas L. Meli graduated college during the Great Recession. He waited tables until he landed a finance job in commercial real estate. In 2012, at age 27, he took a risk and purchased a foreclosed, 950-square-foot condominium in Midtown Atlanta. He emptied out his proverbial piggybank and had enough to put down the 3.5 percent required for a Federal Housing Authority (FHA) loan.

“I had a feeling the market was going to begin recovering soon, but certainly did not have a crystal ball,” Meli says. 

At the time, the economy was soft. He was using up his savings. Plus, he was early in his career and didn’t know how long he was going to stay in the area.

At the time, there was an added worry about foreclosed properties getting hung up in the inspection process. Meli had heard of frustrated previous owners damaging appliances before vacating the property. Meli’s unit, though, was well taken care of and came with new appliances.

Why it’s a risk:

All loans come with a certain level of risk. But, when it comes to mortgages, lenders view anything less than 20 percent down a “risk.” Buyers who can’t bring this sum to the closing table will typically pay Private Mortgage Insurance, or PMI, which is a fee protecting lenders should your loan go into default.

Why you might need to take on this risk

On the other hand, waiting to save 20 percent could present a different kind of risk. Homes could go up in value, outpacing your ability to save and pricing you out of the market. For instance, if you’re purchasing a $300,000 home, that would be a $60,000 percent down payment. With home values rising as fast as they are, in the six or so years it takes to save up that sum, the home could be priced at $400,000 by the time you’re ready to buy. While there are some instances when you can put down nothing at all (i.e. a Veterans Affairs or VA loan), the next tier of low down payments is typically 3.5 percent, and often in the form of an FHA loan.

And it may be no surprise that its not easy for Millennials to save up a chunk of change: The mean value of assets held by millennials in 2016 was about $176,000, almost the same as baby boomers ($173,000) of comparable ages in 1989 (factor in inflation!) and much lower than Generation X members in 2001 ($227,000), according to the Federal Reserve. Add in the struggle to find good-paying jobs compounded by loads of debt, too, doesn’t fare well for the whole “debt-to-income” ratio that comes into play when trying to take on a mortgage. Plus, Millennials credit is so-so and they are marrying later, relying on just one income to take out a mortgage. 20 percent can be downright impossible for some.

If you buy with a low down payment, you will likely have to pay PMI, which typically costs 0.5 percent to 1 percent of the entire loan amount on an annual basis and add to your monthly payments.

The reward

You’ll be building equity, have a shot at your home appreciating in value and earning you some money, and also keep your housing prices stable for the next 30 or so years—against appreciation and inflation.

How to make it less risky

Run the numbers (and have an expert verify them)

Prior to making the purchase, Meli calculated the risk by crunching his numbers: The estimated mortgage, tax, utilities and Homeowners Association (HOA) payment ended up being less than his rent at the time, plus he’d be able to deduct mortgage interest and tax payments from his taxes. It’s a good idea to consult with your mortgage lender and financial planner to determine if you can keep up with your mortgage payments.

Think entry-level

Don’t miss your first shot at real estate if you are interested in becoming a homeowner; it may not be your forever home or your ideal home, and you may need to pay PMI, but it’s possible to leverage your equity and any appreciation to get into your next home. In Meli’s case, he lived in the condo for two years and sold it for a 60 percent price gain. He was then able to upgrade into a bigger home. 

Again, while this is just one person’s story, that doesn’t mean it’s a rare occurrence: Talk to a real estate agent and/or a mortgage/financial professional to weigh how this risk looks for you.

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