Should I Wait to Purchase A Home Until I Can Make a 20% Down Payment?

Question #98 from HOW TO GET A MORTGAGE DURING & AFTER THE SUBPRIME CRISIS

Not necessarily. It depends on your financial situation and/or how you feel about investing in real estate. There are many mortgage programs which allow you to put down less than 20%.

The Real Deal: Nowadays there are many purchasers who make less than a 20% down payment. For instance, in the Garden State of New Jersey, prices are exorbitant in certain areas. In some places $500,000 doesn’t buy that much home. Even if a home is half that price ($250,000) a 20% down payment would be $50,000. Many home purchasers don’t have that much loose change lying around to close the deal. On the other hand, if you can get approved for an FHA mortgage with a 3.5% down payment, you’d only need $8,750. One reason the FHA was developed in 1934 was to spur homeownership and make it easier for Americans to qualify for a home purchase by insuring mortgages. Why not take advantage of it? Even during those times many people couldn’t afford to put down 20% when homes cost far less than they do today.

On the flipside, the more money you put down, the more mortgage products are available to you. You may be able to lower your interest rate and your debt-to-income ratio with a larger down payment. Also, many homeowners feel more secure the greater the equity is in their homes. They feel as though they have funds in reserve and they’re always are able to do a cash-out refinance or get a HELOC if they must have cash.

The question is do you want to put that much of an investment into real estate, do you want to use your cash for another purpose, or do you have the cash period? If one purchaser puts down 20% he could be house rich and cash poor, while putting down 5% could make his economic situation more palatable. Another purchaser could be rolling in dough and putting down 20% is a piece of cake. Another purchaser may feel as though he can never save 20% for a down payment, so why not go for it with what he has? It entirely depends on your situation.

The Bottom Line: Whether you should make a 20% down payment depends on your financial circumstances, how you feel about investing in real estate and/or whether you have the ability to do so.

Copyright by Kirk Charles, 2009. Please do not reprint or redistribute without written consent of Kirk Charles.