How come everyone thinks you have to put 20% down when you buy a Condo?
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How come everyone thinks you have to put 20% down when you buy a Boston condo?
- The median down payment on a home purchase was $26,000 in the first quarter of 2024, or an average of 13.6%, reaching a new first-quarter high, according to a new report by Realtor.com.
- While 20% is considered to be the standard, it is by no means “the law of the land.”
Boston condo for sale buyers are putting down more money to buy a downtown Boston condo — but the typical down payment is still much less than you might expect.
The average down payment was 13.6% in the first quarter of 2024, according to a new report by Realtor.com. The median down payment amount was $26,000.
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Even at recent elevated levels, the average down payment is still well below 20%, a share that people typically think of as the gold standard when buying a Boston condo for sale in 2024.
But 20% is not always necessary, experts say.
There are a lot of reasons why people have gravitated toward the idea of putting 20% down, like trying to avoid mortgage insurance or lessen monthly payments.
One way to reduce your monthly mortgage payment is by putting down more money and borrowing less. But for many households, trying to get a higher down payment can be challenging, said Danielle Hale, chief economist at Realtor.com.
“It really showcases the conundrum the housing market is in where there’s not a lot of affordability,” she said.
Having enough savings for a down payment is a big hurdle for most buyers. Close to 40% of Americans who don’t own a house point to a lack of savings for a down payment as a reason, according to a 2023 CNBC Your Money Survey conducted by SurveyMonkey. More than 4,300 adults in the U.S. were surveyed in late August for the report.
Rising home prices make that 20% goal especially daunting. But the reality is, you don’t need 20%, experts say.
“Not only is it possible to buy a home with less than 20% down, but this data show that a majority of buyers are in fact doing so,” Hale said. “It’s definitely not required.”
Nationally, the average down payment on a house is closer to 10% or 15%, Hale said. In some states, the average is well below 20% while some are even below 10%, she added.
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How come everyone thinks you have to put 20% down when you buy a Condo?
Have you ever heard you need to put 20% down to buy a Boston condo? Or, that you should? Read on, to learn why. Very good article, with lots of stuff even I didn’t know.
Low down payment: FHA loans (3.5% down)
The FHA mortgage is somewhat of a misnomer because the FHA doesn’t actually make loans. Rather, the FHA is an insurer of loans.
The FHA publishes a series of standards for the loans it will insure. When a bank underwrites and funds a loan that meets these specific guidelines, the FHA agrees to insure that loan against loss.
FHA mortgage guidelines are famous for their liberal approach to credit scores and down payments. The FHA will typically insure a home loan for borrowers with low credit scores so long as there’s a reasonable explanation for the low FICO.
The FHA allows a down payment of just 3.5 percent in all U.S. markets, with the exception of a few FHA-approved condos.
Other benefits of an FHA loan are :
- Your down payment may consist entirely of “gift funds”
- Your credit score requirement is 500
- Mortgage insurance premiums are paid upfront at closing, and monthly thereafter
Furthermore, the FHA supports homeowners who have experienced recent short sales, foreclosures or bankruptcies through the agency’s Back to Work program.
The FHA insures loan sizes up to $822,375 in designated “high-cost” areas nationwide. High-cost areas include downtown Boston
Benefits of putting down 20% on a Boston real estate purchase
f you’re thinking of buying a Boston condo in 2021, you may be wondering how much money you need to come up with for your down payment. Many people may think it’s 20% of the loan to secure a mortgage. While there are plenty of lower down payment options available for qualified buyers who don’t want to put 20% down, it’s important to understand how a larger down payment can have great benefits too.
The truth is, there are many programs available that allow you to put down as little as 3.5%, which can be a huge benefit to those who want to purchase a home sooner rather than later. Those who have served our country may also qualify for a Veterans Affairs Home Loan (VA) and may not need a down payment. These programs have really cut down the savings time for many potential buyers, enabling them to start building family wealth sooner.
Here are four reasons why putting 20% down is a good plan if you can afford it.
1. Your Boston condo interest rate may be lower.
A 20% down payment vs. a 3-5% down payment shows your lender you’re more financially stable and not a large credit risk. The more confident your lender is in your credit score and your ability to pay your loan, the lower the mortgage interest rate they’ll likely be willing to give you.
2. You’ll end up paying less for your home.
The larger your down payment, the smaller your loan amount will be for your mortgage. If you’re able to pay 20% of the cost of your new home at the start of the transaction, you’ll only pay interest on the remaining 80%. If you put down 5%, the additional 15% will be added to your loan and will accrue interest over time. This will end up costing you more over the lifetime of your home loan.
3. Your real estate offer will stand out in a competitive market.
In a market where many buyers are competing for the same home, sellers like to see offers come in with 20% or larger down payments. The seller gains the same confidence as the lender in this scenario. You are seen as a stronger buyer with financing that’s more likely to be approved. Therefore, the deal will be more likely to go through.
4. You won’t have to pay Private Mortgage Insurance (PMI) on your condominium
What is PMI? According to Freddie Mac:
“PMI is an insurance policy that protects the lender if you are unable to pay your mortgage. It’s a monthly fee, rolled into your mortgage payment, that is required for all conforming, conventional loans that have down payments less than 20%. Once you’ve built equity of 20% in your home, you can cancel your PMI and remove that expense from your mortgage payment.”
As mentioned earlier, when you put down less than 20% when buying a home, your lender will see your loan as having more risk. PMI helps them recover their investment in you if you’re unable to pay your loan. This insurance isn’t required if you’re able to put down 20% or more.
Many times, home sellers looking to move up to a larger or more expensive home are able to take the equity they earn from the sale of their house to put down 20% on their next home. With the equity homeowners have today, it creates a great opportunity to put those savings toward a 20% or greater down payment on a new home.
If you’re looking to buy your first home, you’ll want to consider the benefits of 20% down versus a smaller down payment option.
Boston Condos and the Bottom Line
If you’re thinking of buying a home and are already saving for your down payment, reach out to a trusted professional who can help you decide what fits best with your long-term plans.
Contact me to find to set up an appointment to start your Boston condo-buying process.
For more information please contact one of our on-call agents at 617-595-3712.
Updated: Boston Real Estate Blog 2024
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