You may be surprised at the answer.
- Ideally, home buyers will make a 20% down payment when purchasing a property.
- A 20% down payment can make homeownership more affordable and allow access to a broader array of lenders.
- In some circumstances, however, making a smaller down payment isn’t a big problem.
When you apply for a mortgage to purchase a home, you will need to make at least some type of down payment with most — but not all — loans. The gold standard for home down payments is 20%, and there are huge advantages to putting so much money down when purchasing a property.
The problem, however, is that saving up to put down 20% of what a home costs can be a major financial challenge — especially in housing markets where properties tend to be very expensive.
If you find yourself wanting to become a homeowner but are far short of the down payment, you’ll want to think carefully about the pros and cons of a smaller deposit on a property, so you can make an informed choice about whether it’s a good or bad idea to buy a home with less money down.
The biggest downsides of buying a home with a small down payment
There are considerable disadvantages of purchasing a property and not putting much money down. Here are some of the reasons why making a small down payment can end up costing you:
- You’ll likely have to pay for mortgage insurance. Mortgage insurance is a type of protection for the lender in small down payment loans. The policies ensure the lender doesn’t end up with losses that aren’t repaid if they have to foreclose on your property because you default. You don’t get protection from foreclosure — the lender can still take your house — but you do get stuck paying the premiums for the protection. This can come at a substantial cost, often equaling around 1% of your loan amount.
- Your choice of lenders may be limited. Not all lenders offer loans with lower down payments. You may have to choose one that provides government-backed loans, such as FHA loans, or that has a low down payment or first-time buyer program.
- Your interest rate may be higher. Since you don’t have as much money on the line, the lender’s risk is …….