It’s a mantra often repeated in the real estate industry: If you want to buy a house, you need a 20 percent down payment. But with the average house in the U.S. costing $311,400 as of December 2013, according to the Census Bureau, all one has to do is the math to get a coronary. Raising a 20 percent down payment isn’t an easy thing to do.
Fortunately, you don’t have to. “It’s a myth that all homebuyers must have a 20 percent down payment to buy a home,” says Nancy Herrera-Siples, a Riverside, Calif., branch manager at Primary Residential Mortgage.
“Putting less than 20 percent is OK with most banks,” agrees Christopher Pepe, president of Pepe Real Estate in Brooklyn, N.Y. So why do you constantly hear that you need to put 20 percent down? Because if you don’t, it usually means you’ll have to shell out money for either private mortgage insurance or government insurance, which is usually financed by the Federal Housing Administration. Mortgage insurance protects the lender in case you can’t make your payments and the house is foreclosed on. But PMI payments don’t last forever. When your loan-to-value ratio is 80 percent, you can ask the lender if you can stop paying PMI; at 78 percent, the lender is required to cancel it.
Still, PMI can easily cost a couple hundred dollars a month, assuming your house is valued in the neighborhood of $200,000. Pepe says the average he sees is $700 a month just for PMI. But keep in mind that he’s based in New York City, which boasts one of the highest costs of living in the country.
So if you really want a house and you’re looking for alternatives to putting 20 percent down, here’s what you need to know.
Figure out financing before looking for a house. There are numerous programs that will help you buy a home without 20 percent down, says Dan Smith, president of Private Mortgage Solutions, a mortgage bank in Atlanta.