One of the questions I continue to hear from prospective home buyers is:
“How much money do I actually need to buy a house?”
And very often, the number they have in their head is 20% down.
For someone looking at a $400,000 home, that assumption means they think they need $80,000 just for the down payment before homeownership is even worth considering.
That can cause buyers to put off purchasing for years when they may have had other options worth exploring with a qualified mortgage professional.
Is 20% Down Required?
No. A 20% down payment is not a universal requirement to purchase a home.
Depending on the buyer's qualifications and the particular loan program, there may be financing options requiring considerably less.
For example, certain conventional programs may permit eligible borrowers to purchase with as little as 3% down. FHA financing may allow a minimum down payment of 3.5% for qualifying borrowers, and eligible VA borrowers may be able to purchase with no down payment in many circumstances.
Of course, qualifying for a particular program and determining whether it is appropriate for a buyer are lending matters. As a Texas real estate broker, I don't advise buyers which mortgage product they should select. That's a conversation they need to have with a qualified mortgage professional.
But there is another part of this conversation that I think we need to do a better job explaining to buyers.
Down Payment Isn't the Same as Cash Needed to Buy
When I talk with buyers in Katy, TX, I want them to understand that saving for a home involves more than coming up with a down payment.
Depending on the transaction, buyers may also need money for things such as:
- Earnest money
- An option fee
- Property inspections
- An appraisal
- Closing costs
- Homeowners insurance and other prepaid expenses
- Moving expenses
- Immediate expenses after taking possession
- Cash reserves
The exact amounts vary considerably from one transaction and buyer to another, which is why I don't like giving someone a generic percentage and telling them, “That's what you'll need.”
The better approach is to look at the buyer's actual situation.
What About Seller Contributions?
This is another reason buyers shouldn't automatically assume that every dollar of their closing expenses will necessarily come out of their pocket.
Depending on the financing, contract negotiations and circumstances of the transaction, a seller may agree to contribute toward certain allowable buyer expenses.
In a market where buyers have negotiating leverage, that can become an important part of the offer strategy.
It doesn't mean a buyer should assume the seller will pay their closing costs. It means price isn't the only financial term worth considering when structuring an offer.
New Construction Can Be Different, Too
For buyers considering new construction in the Katy area, builder incentives can sometimes change the cash-to-close conversation substantially.
Builders may offer incentives tied to financing, closing expenses, upgrades or other items. Those offers can change frequently and usually come with terms and conditions.
That's why I encourage buyers to evaluate the entire transaction, rather than simply looking at the advertised incentive.
A large incentive doesn't automatically make one home or financing scenario the better deal.
Down-Payment Assistance May Also Be Worth Investigating
Texas buyers may also encounter down-payment and closing-cost assistance programs.
These programs have eligibility requirements, participating-lender requirements and other conditions, so I don't tell a buyer that they “qualify” for assistance.
Instead, if it appears potentially relevant, I encourage them to speak with a qualified participating lender who can determine what programs may actually be available to them.
The Question I Wish More Buyers Would Ask
Instead of asking:
“What's the smallest down payment I can make?”
I think the more useful question is:
“How much money should I realistically have available to purchase the home and still be financially comfortable afterward?”
Those are two very different questions.
Someone might technically qualify to purchase with a relatively small down payment but decide that keeping additional reserves is important.
Another buyer may intentionally put more money down.
Someone else may qualify for a VA loan or an assistance program that changes the calculation considerably.
There isn't one number that works for everyone.
Start With the Numbers Before Shopping for Houses
For someone thinking about buying in Katy, TX, I generally recommend getting the financing conversation started before falling in love with a particular house.
A qualified lender can provide estimates based on the buyer's actual finances, anticipated purchase price, loan options and property.
Then, as the REALTOR®, I can help the buyer understand the real estate side of the transaction, evaluate properties and structure an offer with those numbers in mind.
That's a much better position to be in than assuming you need 20% down and deciding homeownership isn't possible without ever investigating the alternatives.
Are you hearing the “I thought I needed 20% down” misconception from buyers in your market, too?
I'd be interested to hear what other agents are encountering.
Jonathan McNabb, REALTOR®
Broker/Owner | Nest Ahead
Katy, TX
281.549.8099
Local Roots | Global Reach
Jonathan McNabb is a Texas real estate broker/REALTOR® and is not a mortgage lender, attorney, tax adviser or financial adviser. This post is provided for general real estate education only and is not lending, legal, tax or financial advice. Loan programs, eligibility requirements, fees, assistance programs and underwriting guidelines vary and may change. Buyers should consult qualified professionals regarding their individual circumstances.
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