Debunking the Down Payment
Busting five common myths associated with down payments
Financing a new home, especially the down payment, can bring a storm of questions. Professional advice can smooth it all over by debunking the myths.
When it comes time to buy a new home, down payments are serious business. Unfortunately, it can also be confusing business and many new homebuyers may get lost in the process. Even worse, many would-be first-time buyers may believe they can’t get a home loan, particularly because of the myths associated with down payments.
If you have no idea where to start, don’t worry, you’re not alone: About 70 percent of adults in the U.S. said they were unfamiliar with down payment assistance, according to a survey by NeighborWorks America, an organization that works to drive change at the local level for individuals, families and communities. That explains why many finance professionals claim new homebuyers come to them on a daily basis with various myths about down payments.
We talked with industry professionals about five common myths surrounding down payments to get to the truth. It’s time to debunk the down payment.
Myth No. 1: You Need to Put 20 Percent Down
One of the most common myths among new homebuyers is that you will need to put 20 percent down on your new home. That’s not always true.
“Over the last 15 years, there’s been a change from generation to generation to where you don’t necessarily have to have 20 percent down to get in,” says Chris Copley, regional sales manager for TD Bank in Mount Laurel, N.J. “But a lot of lenders have different options.”
For example, some lenders, TD Bank among them, offer programs like a 3 percent down payment that often eliminate the need for private mortgage insurance, or an 80/10/10 product that allows the borrower to put 10 percent down plus closing costs.
Dottie Sheppick, senior vice president of affordable housing for Bank of America, agrees, adding that according to the National Association of Realtors, the median down payment in 2014 for first-time buyers was just six percent.
As long as you do your research and seek out professional advice, you should be able to sift through those options and find an affordable program for you that doesn’t necessarily require that 20 percent up front, which brings us to the next major myth.
Myth No. 2: Down Payment Assistance Programs Are Only for Low-Income Buyers
Financial experts report that a good number of inquiries involve customers worried that assistance programs are only designed for low-income homebuyers. This myth is also false.
“Many homebuyers, especially Millennials, haven’t fully investigated home financing options because they don’t know where to look or what to ask,” Sheppick says. “Further, many homebuyers think down payment assistance is only for low-income buyers — not true.”
According to RealtyTrac and Down Payment Resource, nearly 9 out of 10 U.S. homes could qualify for down payment assistance programs when they also fall within maximum income limits. However, 70 percent of adults are unaware of these programs.
As you examine your finances and home-buying budget, it’s important to do your due diligence to learn what assistance is available:
- Talk to a Realtor or mortgage loan officer to determine if buying a home makes sense for your situation.
- Research down payment assistance programs, which provide down payment and closing cost assistance. Repayment often comes with favorable terms or, in some cases, fully forgiven.
- Check with your city, county or state agencies to see if they provide their own approved affordable housing programs.
- Check with your local banks to see if they offer down payment assistance. Both TD Bank and Bank of America, for example, offer tools and professional advice for finding the program that is right for you.
“Buying a home can be intimidating and getting a mortgage has changed in recent years,” Sheppick says, “but there are resources now more than ever to help guide you through the process.”
One of those resources is the aforementioned Down Payment Resource, a database of over 2,400 down payment assistance programs administered by more than 1,250 different program providers.
Striving to reduce that 70 percent of unaware adults, Down Payment Resource makes it easier to find the programs in your area and to check your eligibility.
"We create new opportunities for homebuyers, Realtors and lenders by uncovering these programs," says Rob Chrane, president of Down Payment Resource. "We help connect eligible buyers and eligible properties to programs that can help them get into their new home."
Myth No. 3: It’s Difficult to Get a Mortgage These Days and I Won’t Qualify for One
So what about that housing crisis that happened a few years back? Isn’t now a really difficult time to be seeking a mortgage?
Wrong! That’s just another myth, and it’s a pretty simple fix. Lenders over the last few years are actually starting to ease their stringent mortgage requirements that were put in place after the crisis.
“Find out what options are out there from a loan perspective,” Copley says. “Talk to a couple different lenders and see what kind of products they have available that might fit your needs.”
Their job is to sit down with you and comb through all of your options, your finances and the paperwork. Ultimately, they will do their very best to make sure you qualify and they’ll do the majority of the hard work and number crunching.
“Although the paperwork is more cumbersome, that doesn’t mean the process is weighted down or takes any longer to find the perspective,” Copley says.
Myth No. 4: I’m Prequalified for a Home Loan — I Can Buy the House Now!
Many people believe that prequalification means they’ve been approved for a loan, but there’s a difference between prequalification versus preapproval.
Prequalification is a quick process that determines how much a prospective homebuyer is eligible to borrow on a home loan. The primary benefit of getting prequalified up to a certain amount for a loan is that you are showing real estate professionals and builders that you are serious about looking for a home in a certain range. However, it does not mean that you are preapproved for the loan.
On the other hand, preapproval means that you are credit-approved through a financial institution pending the property you have chosen. The process, which usually takes about 7 to 10 business days, uses the information from prequalification and adds in verified documented information. Once you’ve been preapproved, you may be more appealing to sellers who are considering several offers on their property, as you already have your financing sorted out.
“Getting prequalified gives you an idea of what your loan program and the amount you could borrow might look in advance,” Sheppick says. “However, prequalification is not comprehensive and therefore is not guaranteed or considered any type of loan commitment.”
Myth No. 5: You Will Need Mortgage Insurance
Mortgage insurance is defined as a policy which compensates lenders or investors for losses due to the default of a mortgage loan. It can be either public or private depending on the insurer.
According to Bankrate.com, if your down payment on a home is less than 20 percent of the appraised value or sale price, you must obtain mortgage insurance. Still, even in that case, mortgage insurance may not always be necessary.
“When purchasing a home, the best way for consumers to prepare and plan ahead is to know what options are available,” Copley says. “Speaking with a lender and doing a little research on products and programs that do not require private mortgage insurance will go a long way.”
By the same token, some programs with mortgage insurance can allow for much smaller down payments, even as low as three percent, according to Faramarz Moeen-Ziai, senior vice president of national sales and production at Commerce Home Mortgage in San Ramon, Calif. Yet a smaller down payment may not always be the best way to go.
“Lenders often look at down payment amounts as your investment in the home, so it plays an important role,” Sheppick says. ”Not only will it affect how much you’ll need to borrow, it can also influence whether your lender will require you to pay for private mortgage insurance.”
For more info on deciding what’s best for you, Moeen-Ziai suggests visiting the Department of Housing and Urban Development and Consumer Financial Protection Bureau websites for free resources.