The Mythical 20% Rule

A Word of Advice for First-Time Buyers

You may have heard about the myth of the 20% for buying homes, but that is all it is: a myth. The myth of the average American placing 20% down on their brand new home stems back to the era directly after the housing crisis when the number of available home loans decreased significantly. Since then, improved economic conditions and new mortgage options have almost entirely eliminated the need for a 20% down payment.

Buying a home with less than 20% down may seem intimidating, but Carolinas Telco Federal Credit Union is here to help you through the process. Together, we’ll consider the pros and cons, along with the loan options available to you!

Should you put 20% down on a house?

Keep in mind, there is no best path to ownership. Does a higher down payment make your offer stronger? The easy answer is yes, a higher down payment does make your offer more enticing to a seller. The truth is much more complicated.

Placing an offer with a higher down payment reassures the seller that you are likely to get a mortgage and the deal will go through. Of course, the seller must take into consideration who is most likely to choose the person who will be able to buy the home. A larger down payment also implies that you are less likely to heavily negotiate the price, or ask that the seller pay closing costs.

For a lot of buyers, a larger down payment just isn’t financially reasonable. Putting down 20% cuts deep into finances that could be directed towards saving or investing, paying off debt, or building an emergency fund. Few homes are in perfect condition as well, having some extra cash will allow you to begin renovations right away or start adding minor personal touches.

According to a study done by the National Association of Realtors, the average down payment in 2021 was just 12%, and for buyers under the age of 30, the average was a scant 6%. Ultimately, the down payment you choose should depend on your individual finances and what you can afford.

Types of Mortgage Loans

We’ve developed two great mortgage solutions for our members with first-time homebuyers in mind. Both options are conventional mortgage loans with low down payment requirements.

3% down payment:

Our 3% down payment option is available to first-time homebuyers and allows CTFCU members to finance up to 97% of their potential home’s purchase price, on a 5/1 ARM (adjustable rate mortgage). The rate will remain constant for the first five years and can adjust each year beyond that time. As our gift to you, PMI (private mortgage insurance) is not required!

5% down payment:

The 5% down payment mortgage loan is available to all homebuyers to apply, where 95% of the home’s purchase price can be financed into a loan. This loan has a fixed rate for the entire duration of the loan and, like the 3% down payment, doesn’t require PMI.

How can government-backed mortgage options apply to you?

FHA mortgage:

This loan is made to help first-time home buyers and requires as little as 3.5% down. If the down payment still exceeds your budget, the payment can be sourced from a financial gift or via a Down Payment Assistance Program. The majority of FHA loans require additional PMI premiums, which could increase your monthly payment and the total amount paid on your mortgage.

VA mortgage:

VA mortgages have the advantage of offering very favorable terms in their loans, but they are only available to current and former military members. These loans do not usually require a down payment or PMI, and this loan type can allow for seller-paid closing cost concessions or funds originating from a gift.

USDA home loan:

USDA home loans are backed by the United States Department of Agriculture and require zero down payments. Eligibility to participate in this program is limited to certain geographic locations in the US. Your home doesn’t need to be located on farmlands, but must be situated in a sparsely populated area. USDA loans are available in all 50 states and are offered by most lenders.

*Most of these loans require income eligibility and may require that you pay PMI.

Ready to Buy Your Future Home? We’d Love to Help!

Call us at 1-800-622-5305 or stop by your local Carolinas Telco Federal Credit Union branch today to learn more about our fantastic options and rates. We’ll be there for you from application through closing and beyond!

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