The Down Payment Myth

Key Takeaways

  • A recent survey of 3,000 Millennials found that 53% of them said they hadn’t bought a house yet because they hadn’t saved enough money.
  • You don’t need a down payment of 20% of the value of the home in order to buy it; there are several loan types that don’t require that amount.
  • Weigh the pros and cons of buying versus renting a home to ensure it makes sense to buy a home as there are lot of hidden costs of home ownership.

Way back when I was in my 20s, I was looking at renting, and my brother-in-law told me I could buy a house. I responded, “How can I buy a house? I don’t have a down payment.” He replied, “You don’t need a down payment. You can go through the VA or get an FHA loan.” I was confused as I really knew nothing about these loans, but what I thought I knew for sure was that I had to have a down payment to buy a house.

That was over 40 years ago for me, but it seems this myth is still out there. A survey done by Ellie Mae in 2017 of 3,000 Millennials asked them, “What’s stopping you from buying a house?”, and 53% of them answered that they didn’t have enough money saved to buy a house. They thought they had to have 20% of the cost of the house saved.

While that 20% is correct for a traditional loan, if you have good credit, you can get an FHA loan for as low as 3.5% down. On a $200,000 house, that would be $7,000. There might be additional closing costs and so forth, but that’s not nearly as tough to achieve as saving $40,000 to get to that 20%. Also, if you are a military Veteran, a VA loan is 0% down, so that’s even better.

The real question here is does it make sense to buy or rent a home?

There’s a lot of elements to consider here. If you buy a home, you have the upkeep in terms of maintenance and repairs. Then there’s the principle, interest, taxes and insurance to pay. There’s also a time element. You want to own the home for at least five to ten years to take advantage of the appreciation, so you don’t lose money when you go to sell.

Yes, you can buy a home, if that’s what you really want to do. Just make sure you have the finances set up, do a worksheet perhaps of the pros and cons of buying versus renting, and ensure you are going to own the home for a while. But you don’t necessarily need to wait to accumulate 20% of the value of the house you want.

Until next time, enjoy!

Gary

Gary has provided wealth management services to clients for over 30 years. He is credentialed in financial services with practical experience in all areas of finances and money. He is the author of Changing the Conversation, Wealth of Everything, and co-author of The Business Battlefield.

He is genuinely interested in getting to know the person in front of him. Who are they? What’s most important to them? Where do they want to go in life? Whether he’s advising clients, mentoring his team, or coaching entrepreneurs, Gary is always simplifying complexity and motivating others to take the next action that’s right for them.

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