Have you been told you need a 20% down payment to buy a home? This is one of the biggest myths in the industry and what stops most people from even considering buying a home. We hear it from people all the time and it’s absolutely false- you do not need a 20% down payment to buy a home!
In fact the average down payment for a first time buyer is just 6%.
The smallest down payment you can make is 3-3.5% depending on if you go with conventional or FHA financing. There are of course some other more specialized types of financing including down payment assistance plans (they typically have income restrictions) and if you’re a veteran you can apply for a VA loan, which will cover your down payment and closing costs.
A 3% down payment is a far more reasonable sum of money to save up than a 20% down payment but let’s break down what that actually looks like. We will use the Portland metro market as an example for our math. So if you live in the Portland area the median sales price is about $525,000, so a 3% down payment would be just under 16,000. But let’s say you’re just trying to literally get your foot in the door. The average starter home is going to be closer to $400-425,000 dollars, if you are looking a little further outside the city depending on the area it might be a little more or less than that but for now let’s say $400,000. A 3% down payment on a $400,000 home would be $12,000. Now that’s not to say having $12,000 is easy, and won’t take many people some time to get there but a 20% down payment on that same home would be $80,000!
Ok we’ve done the math you don’t need $80,000 to buy a house, here’s what you really need:
Down Payment
At least a 3% down payment- the bigger your down payment the lower your monthly costs will be. For several reasons, firstly the more money you pay up front the less you are mortgaging. And secondly, the bigger your down payment (plus the higher your credit score) the better your interest rate will be. The increments to keep in mind are this: 3% to qualify, 5% you will get a better rate, 10% an even better one and if do you get up to 20% you don’t have to pay Private Mortgage Insurance.
Closing Costs
In addition to your down payment you will need to account for what we call closing costs. Closing costs are typically 2-5% of the loan amount and may include things like
- The fees owed to the lender for processing your mortgage
- The appraisal on the home
- Your first year of property taxes and home owners insurance
- Your first mortgage payment
Depending on what is occurring in your real estate market and your personal financial situation we can sometimes negotiate up front to have the seller of the home pay for some or all of your closing costs as part of transaction so don’t let this deter you but do be aware of it.
Inspections
And lastly you will want to have enough to pay to have the home inspected depending on where you live this usually costs between $600-1000. In Portland we reccomend these inspections on most homes:
- General whole home inspection
- Radon Testing
- Sewer Scope
- Tank Sweep
So there you have it. If you have at least a 3% down payment saved you might be ready to buy a home! If you think you are at this point, or you’re not quite sure how close you are the easiest way to find out is to get pre-approved for a mortgage. It’s really easy, it’s absolutely free, and it will tell you definitively how close you are to homeownership. Drop us a comment if you want more information on getting pre-approved or have any other questions! Check out our upcoming events calendar for our next Home Buyer Masterclass where we sit down with local lenders to discuss everything you need to know about buying a home!
PNW Real Estate Blog 
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