Seven Pervasive Myths About Real Estate Down Payments
There are several routes that potential homeowners can choose to get information about real estate purchases. However, some of these sources may give outdated information. For first-time buyers, this misinformation can create some strange misconceptions about the process of purchasing.
One of the most common areas that potential homeowners are typically misinformed about is down payments. From the size of the down payment to how it impacts the purchasing process, there are several misconceptions regarding this stage of purchasing a property. To help, seven professionals from Forbes Real Estate Council try to debunk the most pervasive myths they’ve seen regarding down payments.
1. You Can’t Buy Without A Large Down Payment
The most common myth I have heard surrounding down payments is that you need a large one to purchase a home. You can debunk this by researching and providing the customer with multiple lenders to compare loan products while supplying them with quality educational resources. The more they can compare and learn, the more likely they will enter the marketplace rather than sitting on the sidelines. – Collin McDowell, Greg Garrett Realty.com
2. A Lower Down Payment Makes For A Poor Offer
People worry that their offer may not be as strong with a lower down payment. While it’s true that some sellers would prefer a cash offer over financing, one should not feel like their profile is less appealing just because they are taking on greater than 80% financing. Private mortgage insurance means the bank is protected, and there’s no reason for considering this type of financing inferior. – Melissa Cohn, Raveis Mortgage
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3. Down Payments Are Not Necessary
People have the misconception that down payments are not necessary for a home purchase and should be avoided. Down payments serve two primary functions: They let the seller know the veracity of your offer and help with negotiations. This can show financial strength. Also, down payments are a wise choice if you want to keep a home payment low and get a better interest rate for long-term financial strength. – Alexander Chandler, Berkshire Hathaway HomeServices Alexander Chandler Realty
4. Only A Down Payment Is Needed At Closing
For those unfamiliar with the homebuying process, there might be a misconception that the down payment is the only thing all buyers have to put forward at the closing. In reality, there are other fees that may be charged like an inspection fee, origination fee, title and closing and appraisal fee. Homeowners and lenders should be sure to discuss these fees openly to clear up misconceptions or myths. – Miriam Moore, ServiceLink
5. Down Payments Must Be Cash
Buyers should keep in mind that a down payment doesn’t need to be in cash or 20% of the mortgage. For example, with a pledged asset mortgage, a buyer can entirely eliminate the down payment on the house, secure a lower interest rate and avoid private mortgage insurance (PMI) payments by pledging a stock portfolio as collateral instead of paying a cash down payment. – Deniz Kahramaner, Altasa
6. There’s No Need To Put Down More Than 20%
New buyers often believe there’s no need to put down more than 20% of the mortgage. However, in a competitive seller’s market, a larger down payment creates a competitive advantage. Because of record-high prices and a strong preference for noncontingent offers, a large down payment reduces the risk to the seller that an offer will fall out of contract due to a property not appraising at the offer value. – Megan Micco, Compass
7. You Can Put Down Three To Five Percent
The one myth first-time homebuyers seem to believe is that they only have to put down three to five percent, but they forget about additional costs to acquire the home—maybe it will need new blinds, carpet and landscaping. Maybe they will have to purchase new appliances for the home. First-time homebuyers need to be made aware of the other costs associated with the purchase of a home, e.g. insurance and utilities. – Nancy Wallace- Laabs, Profitable Landlord System