4 Common Down Payment Myths
Mortgage Broker
Chris Carter
Published on October 1, 2022

4 Common Down Payment Myths

Myth #1: You need to put 20% down

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For a lot time, 20% down was considered the golden rule of real estate financing, and is still believed to be the case by many today. Luckily, times have changed! These days, most loan programs, including conventional, FHA and VA require between 0% and 5% down, depending on the loan type. Of course, this pertains to primary residences. Other types of residences, such as investment homes, can come with much larger down payments. That said, if you have the means, making a larger down payment than the minimum can be a good thing. Of course, you should talk to a qualified independent mortgage broker to discuss what might be best for you.

Myth #2: Paying PMI is always smarter than making a large down payment.

In today’s mortgage industry, if you put less than 20% down, lenders require that you pay private mortgage insurance (PMI). This insurance policy protects the lender against the higher risk, and against loss by loan default.

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If you’re not able to save up the funds to make a larger down payment, PMI can be a small price to pay in exchange for the opportunity to become a homeowner. However, depending on the terms of your loan, it may end up costing you more, in total, than you would have paid if you made a larger down payment upfront, and in the end, depends on the type of loan you obtain.

Most conventional loans stipulate that you only need to carry PMI until you have paid down your mortgage enough to have a 20% stake in the property. However, with FHA loans, their MPI payment sticks around for the life of the loan. VA loans, while typically having a “funding fee” (VA funding fee can be waived with VA issued disability rankings), which is much like up-front mortgage insurance, do not carry mortgage insurance.

Myth #3: Your down payment is the only money you need to bring to the closing table.

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Unfortunately, your down payment amount only represents a portion of the money that you must bring with you to the closing table. While the exact amount that you can expect to pay will vary, there’s also closing costs and cash reserves to consider.

Closing costs account for any fees that you incur when closing on the home. These can include inspection fees, origination fees, title fees, and escrow account fees, which are pre-funded to later pay property taxes & homeowners insurance. These can account for an additional 1%-4% of the property’s overall purchase price.

While cash reserves technically aren’t a charge that you have to pay, and many loans do not require them, sometimes they need be present in your bank account at the time of closing.

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Myth #4: Down payment assistance is only for first-time home buyers

While it’s true that many down payment assistance programs are geared toward first-time home buyers, that’s not always a requirement. For one, even if you’ve owned a home before, you may still be considered a first-time home buyer. The Department of Housing and Urban Development (HUD) considers anyone a first-time home buyer, if you have not owned a home within the last three years.

For another, rather than being hinged on first time-homebuyer status, eligibility for many down payment assistance programs is based on other factors like your income, the location of the home, or the home’s purchase price.

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