Many home buyers in New Jersey believe that they have to make a down payment of at least 20% to qualify for a mortgage loan. But for a typical home purchase, a down payment of that size usually isn’t required. In fact, a new report showed that 52% of buyers in New Jersey and nationwide made down payments of less than 20% when purchasing a property.
Down Payments Below 20% Are Very Common
There are a lot of myths and misconceptions regarding down payments in New Jersey. One of the most prevalent misconceptions has to do with the size of the investment, and the amount that is required to qualify for a mortgage loan. Surveys by the National Association of REALTORS® and other groups have found that many home buyers believe they have to put down at least 20% on a purchase.
Last month, the economic research team from Zillow put out the latest edition of their “Consumer Housing Trends Report” for 2018. It’s a wide-ranging survey covering all kinds of topics that are relevant to home buyers. Their survey “gathered information from a total of 13,439 key household decision-makers” from New Jersey and other states across the U.S.
Among other insights, their study showed that 52% of home buyers make down payments of less than 20% when purchasing a house or condo. This clearly debunks the myth that borrowers have to put down 20% or more to qualify for a mortgage loan.
Granted, there may be cases where a 20% down payment is required. That’s sometimes the case for larger “jumbo” loans used in higher-priced real estate markets. (And even then, there’s often some flexibility when it comes to upfront investment.)
But for the typical home buyer in New Jersey, it’s often possible to put down a lot less than 20%.
These days, conventional loans allow borrowers to put down as little as 3% of the purchase price. The Federal Housing Administration (FHA) program has a minimum required investment of just 3.5%. Additionally, most military folks in New Jersey can use the VA loan program to avoid making a down payment altogether. Those are just a few of the ways to avoid putting 20% down.
Mortgage Insurance to the Rescue
Home buyers in New Jersey who put down less than 20% on their purchases usually have to pay for mortgage insurance. Private mortgage insurance (PMI) is typically required whenever the loan-to-value ratio rises above 80%. The FHA loan program also requires a government version of mortgage insurance for home buyers who use that program.
Some borrowers choose to make down payments of 20% or more to avoid paying for this insurance. Of course, not everyone can afford such a large upfront investment on a home purchase. And that’s where the mortgage insurance industry comes into the picture.
The PMI industry allows home buyers in New Jersey to buy a home sooner and with less money down. Without that insurance backing, the typical borrower would have to save a lot more money for the upfront investment on a home purchase. Fortunately, that’s not necessary.
The take-home message for buyers: There is a common misconception among some home buyers in New Jersey that a down payment of 20% or more is needed to qualify for a mortgage loan. But that’s not always the case. The study cited above showed that slightly more than half of all buyers in the U.S. make down payments below 20%.