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20% Down

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Posted On: 09/05/2017

Question: We’re interested in buying a home and can purchase with 20 percent down. Would it make more sense to buy with less money up front?

Answer: There’s no rule that says you have to buy with 20 percent down if you have it but it’s a choice that lenders love. The logic is if a home is purchased with 80/20 financing, the lender has a big cushion if something goes wrong. Example: You buy a home for $300,000 with 20 percent down, lose your job, the house is foreclosed and the property sells at auction for $260,000. That’s a loss of $40,000 but to the lender there is no loss: the property sold for $260,000 but the property was financed with a $240,000 mortgage (80 percent of $300,000). The $260,000 from the foreclosure sale allows the lender to be completely paid back.

Buying with 20 percent also has advantages for purchasers. You’ll owe less so the monthly mortgage payment is smaller. With 20 percent down there’s no requirement for private mortgage insurance, a big savings. If you have some credit dings a big down payment is likely to be seen as a compensating factor that will make your mortgage application more attractive.

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But while lenders like financing with 20 percent down you may not. It takes a long time to save so much money, a tough job for many. According to a 2016 survey by GoBankingRates.com most of us – almost 70 percent – have less than $1,000 in savings.

In today’s world buying with 20 percent down is a luxury for most purchasers. According to the National Association of Realtors, in 2016 first-time buyers typically bought with 6 percent down while repeat purchasers were able to pay 14 percent up-front.

As an alternative to 20 percent down you can readily finance with the FHA and 3.5 percent up-front while VA-qualified borrowers can purchase with nothing down. There are also new conforming loans with just 3 percent down.

Why would you want to purchase with less down if that means higher monthly costs and some form of mortgage insurance?

You might have a better use for the down payment money such as starting a business or paying off education debt. You might be more comfortable with cash in the bank. Having cash on hand can be important in the event of emergencies. And, while you may be able to buy with 20 percent down will you then have enough funds for closing, moving and repairs?

Peter G. Miller is author of "The Common-Sense Mortgage," (Kindle 2016). Have a question? Please write to peter@ctwfeatures.com.

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