A down payment on a house doesn’t need to be 20%. Here’s why

A down payment on a house doesn’t need to be 20%. Here’s why

Let’s bring you in on an open secret that may transform how you’re thinking about your house hunt: You don’t need a 20% down payment to buy a home.

Most people in America don’t buy their homes with that much money down. The median down payment in a National Assn of Realtors survey of buyers who purchased from July 2020 to June 2021 was 13%. For people ages 23 to 31, the median was 8%.

Douglas Lazo, 32, who bought a home in September with his partner, said they thought 20% down was the only way until they met with a loan officer.

“We thought, ‘Wow … that’s a whole chunk of change,’” he said. Then the officer helped surface a 10%-down loan option that worked. “It’s about really knowing the numbers.”

Most lenders will offer loans with as little as 3% down. The smaller down payment usually comes with added costs and some drawbacks. Lenders want assurance that with less skin in the game you aren’t going to walk away, so you’ll typically have a higher interest rate and have to pay for mortgage insurance.

Some people dip into their retirement savings accounts for down payment funds. While some experts warn against touching those accounts, others say it’s OK in a pinch, if you understand the trade-offs and risk of sapping your retirement potential.

Early withdrawals from 401(k)s come with heavy penalties and taxes. You have the option of taking out a 401(k) loan of up to $50,000, without penalties, but you would pay that back with interest.

For IRAs, first-time home buyers can withdraw up to $10,000 for a down payment. That’s taxed but there is no early withdrawal penalty.

Now, let’s review the common loan types and what they offer in terms of low down payment options. Then, we’ll introduce you to down payment assistance programs.