Can I buy a house for less than 20% down payment? Today, I want to cover a couple of things when it comes to how much cash you need as down payment when buying a house. The first one is what you can do nationally. The other is what is potentially available to you as a home buyer or an investor versus what will actually succeed in this Bay Area market. Because these two are very different things, I think it’s really important to pay attention to these when you consider what you should do and what you can do here in this market.
But first, a disclaimer: I am not a lender. I am not licensed to do loans and mortgages. However, I know what’s available conceptually. That is also my purpose for doing this video–to give you a sense of what’s available so you can have a more educated conversation with your lending professional.
As to what is possible and what is available? Let’s talk about it at various levels before you jump in.
Buying cash vs. Getting a Loan
So the first option is going for an all-cash offer. If you are frugal, have saved aggressively, or have made enough money, you can obviously just make an all-cash offer and pay for your house in cash. Doing so not only speeds up your process but also makes you more competitive.
However, if you decide you don’t want to use all of your cash to buy a house, you can always get a loan. You can get loans in many different increments of down payment size too. This is where a lot of the hang-up comes in our market. That is why I want to get into this topic of what’s available and what will succeed to give you the best chance of success when choosing to get a loan.
If you choose to go for a loan, the typical number most people are trying to hit for a down payment when buying a house is 20%.
This is because a 20% down payment gives you the best terms. Also, with this down payment rate, you will not need what’s called private mortgage insurance (PMI). This additional payment is required for down payments below 20% because there’s an added risk of defaulting to the loan.
That’s what it is about when most people talk about getting a loan as a conventional 30-year—with a 20% down payment. Most people are talking about a 20% down payment when buying a house, but you can, of course, do a 40% or 50% if you have the amount of cash to make that happen. Whichever amount you go for, you should definitely discuss with your lender what the incentives, rates, points look like if you put more cash or less cash. But know that having a 20% down payment is the most common option. Then you start to back down into the 15% and 10% world.
Now, as I’ve mentioned earlier, there’s this thing called mortgage insurance. If you use a lower down payment when buying a house, meaning below 20%, you’re going to have to pay this mortgage insurance. The whole point of this is to have an insurance policy on behalf of the lender because your ratios of how much you owe to how much the house is worth are closer. Moreover, if the market dips and it defaults and goes underwater, those lenders could lose money, so they want an insurance policy that you have to pay for.
Now usually, when you’re above 10%, it’s not quite as expensive as when you’re below 10%. We’ll get to that in a second but just know that down payment at those rates also exists.
Lower than 10% down payments
So now you come into this lower than 10% world. Now you start to get into a variety of loan products. I won’t call these loans exotic, but they are less common here in the Bay Area. However, there are also some fantastic options around the country. These options include the FHA loans, the 203(k) loans, and the more conventional lower down payment loans. Also, there are different options with 3.5% and even 5% down payment that give you the flexibility based on the cash you have available.
All of them are different, especially when you get into that FHA or that 203(k) style loan. There will be different underwriting criteria not only on you as the borrower but also on the house. They’re going to want to see things like a clear pest report and some other things that make it a little more challenging to get in a contract. That is true, especially here in our market where it’s totally as-is. But just know that there are some very, very low down payment options that you can use.
In addition, depending on what neighborhood you’re looking in, what agent you have, and what lender you have, it’s not impossible but is definitely a lot harder to succeed. However, there are instances where those make a ton of sense. So that gives you a really broad overview of how much you could put down.
Let’s now talk about our market here in the Bay Area and what will be the highest chance of success, realistically.
Simply put, more cash is better.
Anything at or above 20% is going to be viewed very favorably. If you’re at 20%, 25%, 30% down payment, and above, people are going to consider that very strong. Your ratios are really good. You’re going to be able to absorb a shortfall in an appraisal potentially. In general, you just really look stronger to the seller with a down payment on those figures.
As you start to go backward from 20% down to zero, you would look like a bigger risk to be in escrow with. There are several things you’re signaling with that lower down payment, making it harder for you to succeed, especially when there’s so much competition at or above that 20% figure.
For example, if there’s an appraisal shortfall, you likely don’t have the cash to cover it. And that’s a risk to the seller and of the deal falling apart. You also may not be as strong of a buyer because you just don’t have the cash position.
Now, that being said, that’s not to say you can’t win. It’s just going to be a little harder and requires you to be a little more strategic. If you’re one of these people who’s in that 10%, 12%, whatever percent down payment and you’re looking for an opportunity, here’s a couple of tips for you.
Tips for people with less than 20% down payment when buying a house
Look at properties in some outlying areas.
Number one, look at properties that are a little bit more in some outlying areas. Look for properties that are not like in the core of Oakland, Berkeley, or Piedmont. It would be a little more challenging for you to succeed if you look for something to buy in those neighborhoods. Those neighborhoods are just so popular right now, and the likelihood you would succeed in those neighborhoods with such a low down payment is slim. Moreover, there is that factor of so much cash flowing into those housing markets, making it even more challenging.
Look for houses that have been sitting on the market for longer than 20 or 21 days.
Number two, look for houses that have been sitting on the market for longer than 20 or 21 days. In our market, such a situation or case only means or shows something’s languishing. Maybe it came back on the market because it fell apart. Or perhaps it’s just not getting the attention it needs. Maybe it’s overpriced, or it’s poorly presented. Whatever the case might be, just keep in mind that there’s an opportunity on each of those cases.
Also, sellers of listings in those situations might be a little more desperate and might be willing to work with you a little bit more. For example, in Alameda, I actually had a client who had a 10% or 12.5% low down payment. However, we were able to get them into a townhouse that has been sitting in the market for over a month.
Look for listings represented by out-of-town agents.
Luckily, for the same clients I’ve mentioned for my second tip, the agent representing the sellers was from out of town. He was from Sacramento, so he didn’t really know all the norms and the customs of pricing and negotiating we do here.
We were able to get him to accept our offer, even with that lower down payment, because those rates didn’t throw off the alarm bells for him immediately. Therefore that’s the third tip–look for those out-of-town agents who don’t know the customs and the norms of the market you’re shopping in.
In any event, regardless of what pre-approval or down payment amount you’re going for, make sure you get fully underwritten. If you are to go shopping in this market, it makes a difference if you can confidently say, “Even though we’re doing a 10% down, we’re fully still underwritten.” Lastly, see to it that your lender calls the agent and gives them the story of what you’re doing, why you’re doing it, and so on. That is what you’re looking for ultimately because then, you can pull that loan contingency and get a step closer to succeeding in this market.
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Here’s to all your success!