Finding the perfect home is difficult enough, but there are many more challenges to overcome once you’ve found it. It’s likely you’re competing with multiple competing offers, so now the challenge is finding a strategy to make your offer as strong as possible.
Many hopeful buyers consider increasing their down payment. So, how much should you put down?
In most situations, homebuyers are encouraged to aim for a 20% down payment. Lower down payments may be risky for lenders. Sellers can also be wary of an offer with a lower down payment as it can mean a higher chance of failing to secure financing.
So, does it mean that putting more than 20% down makes your offer stronger? As with many things in real estate, this question is tricky and depends on many circumstances.
What is the average down payment on a home?
While 20% of the purchase price is the traditionally accepted target for making a down payment, it’s far from the norm. Over the past few years, the median down payment for a first-time homebuyer has been just 6%. For repeat buyers, it’s higher with an average of 14%. This is quite a significant drop from an average of 23% back in 1989.
For buyers who can’t make 20%, paying less isn’t that big of a deal. Interest rates remain historically very cheap, meaning the costs of taking out a bigger mortgage aren’t as painful as they used to be.
Paying less on a down payment also frees up more funds for renovations, which can increase your resale value. Of course, paying less also means you’ll have to pay private mortgage insurance (PMI) until you can build yourself up to 20% equity. A lower down payment will also mean a higher interest rate from your lender as they seek to compensate for the riskier loan.
Why does the seller care?
At first, the size of your down payment seems like merely a lender-borrower issue. The seller still gets their money either way, so why should it influence their decision?
The seller knows that the home will have to be appraised for the total amount financed plus closing costs. An appraisal contingency means that if the appraisal finds the home worth less than the mortgage amount, the buyer can be denied their loan. This is bad for the seller because they may have lost other potential buyers while the property was off the market. As such, a seller is more inclined to favor buyers who can make the minimum 20% down payment.
Summary: A Higher Down Payment Makes a Difference
So does making a higher down payment increase the strength of your offer? Yes; it shows more commitment to closing as you have more skin in the game and you have a higher chance of securing a mortgage.
However, any benefits need to be weighed against the downsides. A higher down payment means fewer funds to cover closing costs and renovations. It could also deplete your savings and leave you with no emergency funds, putting you at risk of defaulting. Each situation will vary from one person to another so consult your real estate agent and attorney to find the best way forward.
Review the list of NAEBA realtors in your area to get your homebuying process started with an expert you can trust.