The time-honored belief that homebuyers need to have a down payment of 20% to purchase a home is just a myth which, according to some, has its roots in home selling practices.
ReMax agent Adrianna True told Cowboy State Daily that although she and her father are both realtors, even her mother believed True needed a 20% down payment when she bought her first home in 2019.
“It’s such a myth, but everyone still believes it,” True said. “My mom said that I hadn’t saved enough money to buy a house, since I didn’t have 20%. I had $10,000, but she didn’t think that was enough. It was really eye-opening for me.”
True said on average, for conventional borrowers and those taking advantage of first-time buyer programs, the down payment can be from 3.5% to 5%.
Cindy Bradley, a mortgage lender for Wallick and Volk, told Cowboy State Daily those numbers are similar to what she advises.
True said that the 20% down payment myth is rooted in a racist real estate practice called “redlining,” where services are withheld from potential customers who reside in “hazardous” neighborhoods, ones that are usually populated with racial and ethnic minorities and low-income residents.
The National Board of Realtors has pushed to end redlining and ensure real estate is available to all, she said.
Bradley said that the 20% rule started decades ago when banks did not have mortgage insurance. As a result, if a person defaulted on a loan, the bank would lose money.
“The bank says, ‘OK, I’ll let you do 5% down instead of 20%, but now you have this mortgage insurance, so that’s our guarantee that everything will be whole in the end,'” Bradley said. “The bank isn’t at risk, because the mortgage insurance will make them whole, so they allow for less down payment.”
Conventional loans require mortgage insurance until a homeowner’s equity in a home raeches 20%, but the Federal Housing Authority loan, aimed at first-time homebuyers, requires mortgage insurance for the lifetime of the loan, although its cost falls every year.
While True said that having 20% down for a house is not a bad thing, a person should not let the lack of that money stop them from pursuing house buying. She added that it has been around 20 years since the 20% down payment rule stopped being so rigid.
“It’s so frustrating to me to see these myths perpetuated, especially for young people,” she said. “I cannot tell you how many times my phone has rang and someone is looking for a rental, because they don’t think they have enough of a down payment for a house. They’ll tell me they have a 720 credit score and $10,000 saved, but they still don’t think it’s enough.”
She pointed out that a 620 credit score is the minimum required to qualify for the first-time homebuyers’ loan in Wyoming, but also noted that the higher a person’s credit score, the better off they will be.
In 2021, the National Association of Realtors found that the average down payment on a house or condo was 12%, but for home buyers 30 and under, the average down payment was 6%.
Bradley said that more and more people are choosing to make lower down payments and let the rest of their money sit in the bank and collect interest.
“It’s really a matter of asking is it important to keep your mortgage payment low or can you afford the higher mortgage payment and get in for as little as possible?” she said. “It just really depends on a person’s situation.”
