Depending on your credit score, debt-to-income ratio, and your overall situation, you might be able to buy a home with no money down. Some loan programs allow small down payments of 3% of the purchase price, as well.
While it’s possible to buy a home without much money down, it may not be the best idea. Of course, this all depends on your situation. Let’s look at the pros and cons of buying a home with a small down payment before you make the final decision.
Pros of Buying a Home with a Small Down Payment
1. Buy Your New Home Sooner
One of the main reasons and benefits of putting down a smaller amount is the ability to buy a home sooner. If you’re in a hurry to go from renting to owning, a smaller down payment might be an option to get you there.
According to TheBalance.com, saving 20% for a home down payment can take years, potentially even decades. Instead of waiting, you can choose a loan program with a smaller down payment or even no down payment.
2. Leave Money in your Emergency Fund
If you cash in all your savings for the down payment on a home, you won’t have anything left for emergencies. A smaller down payment allows you to keep money in the bank in case of an emergency.
3. Provides Cash for Improvements
With a smaller down payment, you can leave some cash for improvements to your new homes. This can be helpful if you plan on repairing or improving something with the home you’ve chosen to buy.
4. Makes it Easier to Furnish Your Home
If you’re moving from a small apartment to a home, you’ll likely need some money for furniture, home decor, and other items. If you drain your savings account for the down payment, you might not have anything left for furniture.
Cons of Buying a Home with a Small Down Payment
1. Higher Interest Rates
Most programs offering smaller down payments will come with higher interest rates. Over the course of the loan, you’ll end up paying more for your home than if you waited and put down a larger amount.
2. Higher Mortgage Payments
When you put less money down, you’ll finance more and you’ll have a higher interest rate. This leads to higher monthly payments on your mortgage. This can put a strain on your monthly budget and make it hard to keep the home over the course of the loan.
3. Private Mortgage Insurance
Unless you qualify for a VA home loan or another program not requiring PMI, you’ll need to pay private mortgage insurance. The only other way to avoid it is to put down at least 20% of the purchase price of the home.
Private Mortgage Insurance is another cost you will pay for every single month. It will make your monthly payment even higher, which also means you’ll pay more for the home over the course of the loan.
4. Weaker Home Offer
When you make an offer on a home, your offer will be viewed as weaker compared to home offers with a higher down payment. It might be hard to compete for the right home if you don’t have enough money to put down.
5. Fewer Loan Programs to Choose From
With a good credit score, decent Debt-to-Income Ratio, and a down payment of 20%, you will have plenty of mortgage programs to choose from. However, if you choose a smaller down payment, the number of programs you have to consider will be much smaller. In fact, you might only find one or two loan programs you qualify for making the decision more difficult.
According to a USNews.com article, the median home down payment is 12% for all homebuyers and 6% for first-time home buyers. There are programs to help first-time homebuyers with down payment assistance and loan programs for first-time buyers allowing smaller down payments.
While these stats might make you think it’s’ common to put less money down, it’s still a good idea to put as much down as you can. Of course, you still want to make sure you have plenty of emergency funds and the home purchase fits into your budget.
Before you choose to buy a home with a smaller down payment, consider all possibilities. It might be better to wait a year and save more money or you could also shop for a less expensive home.