20% down payment for a house?

Question

It seems to me to be kind of hard to accomplish.

Let's say Jim and Suzie want to buy a $200,000 house down the street from where they are renting. . A $40,000 down payment is 20%.

Let's say you and your spouse start saving when you are both 22. Let's assume you are able to stock away $600/month. That would be pretty darn good, right?

So, you have saved $7200/year. So it would take you appox. 5 1/2 years to save up for the down payment of $40,000. And you live life happily ever after.........

But not so fast. We fail to recognize that the home you originally wanted to purchase for $200,000 has increased 4% a year, and is now worth roughly 20% more than it orginally was. So it is now a $240,000 home.

So Jim and Suzy start saving another 11/2 to save up for the appropiate down payment again. So it took them seven years to save up for the down payment, assuming Jim and Suzy never lost their job, never had a financial crisis, and never had a medical problem they couldn't pay for.

So, maybe Jim and Suzy could buy a house when their 30.........if things go perfect.

A 20% requirement for a down payment is impossible for a first time home buyer.

Answer 1

FHA is a fantastic home program for 1st time buyers, and it requires 3% down. plus there's something called sellers concession. which is basically making a higher offer and then getting the money back.

say a house is 100,000. you need 3,000 for the down payment. you can offer 105,000 with 5,000 coming back to you for closing costs and down payment. basically it's a way to buy your house with no money down because you've worked everything into your mortgage.

hubby and i bought our first home in december and that's exactly what we did!  

Answer 2

Maybe.  Maybe not.  You might get some help from a relative, or you might buy less house.

Or you might go for 10% down, too.  In my area, that means you'll be paying PMI - private mortgage insurance - in addition to the principal, interest, taxes, and regular insurance.  But it's not that much extra cost, especially compared to the $600 per month your example couple is socking away.  And once the house has appreciated so that Jim and Suzie hold at least 20% equity, most lenders will drop the requirement to carry PMI on the loan.  So in your example, if they settle for a $150,000 fixer-upper, and put down 10%, they can save the down payment in just about 2 years, and have 8 years to be building equity.

Ask your realtor and potential lender for details.

Answer 3

Maybe Jim and Susie could start out by buying a $135,000 house instead of a $200,000 one.

Maybe they decided to be really frugal and thrifty so they could live on Jim's salary only and bank all of Susie's pay, in which case it would only take them two or three years to save up the down payment.

Maybe Jim's dad or Susie's mom gave them $10,000 as a wedding present and they were smart enough to bank it instead of blowing it on a cruise to Aruba where they both would get sunburned.

Maybe they decided they wanted the house badly enough to pay PMI, so they only put 10 or 15 percent down.

Maybe Susie was in the Army and qualifies for a VA loan.

There's a lot of different scenarios that could happen that make the house absolutely NOT impossible for Jim or Susie or any of their friends. You need to stop being so gloomy about the future and start thinking more creatively, instead.

Answer 4

Presumably the couple have also increased their salaries during this same period of time, and have increased their savings towards the downpayment?

Answer 5

I agree.

Answer 6

1.  You forgot that the couple is also earning interest on the money they saved, which should be close to that 4%.

2.  The couple should also be getting pay raises at least 4% a year, probably much faster if they work hard and earn a promotion or two.  Most folks make a lot more money than where they started from in the first 7 years.  So their monthly savings rate will be in excess of 4% growth a year.

With just the 2 items above, they should get that time back down to the 5.5 years or below.  I know lots of people who saved and bought houses with 20% down, even paying for weddings and vacations on the way.  The trick is to cut costs on all the little things... cook at home and eat out less, buy clothes/necessities on sale, cheap or used cars (saves on insurance too), adventure vacations (camping/back packing) instead of luxury hotels.  

In fact, my best friend now makes a ton of money, but he still spends like he is on his starting salary budget.  You'd never know by his run down car and plain clothes that he is sitting on a fat bank account and payed off his house in 7 years!  Usually you have to give up looking rich, to becoming rich.

Answer 7

And your down payment money has ben sitting in the bank earning 4% the whole time while housing prices have gone up 4%. So Jim and Suzy come out even.

What's wrong with waiting until you are 30 and financially ready before you buy a house??? Do you think your parents left their childhood home, and bought immediately? Think again. They scrimped and struggled and saved for years. And they came up with a 20% down payment. Because back then, there was no other way to buy a house. You HAD to have the 20% down payment. That's how it worked for generations. Until now. Until the age of instant gratification. And look what a mess breaking the 20% rule has gotten us into.

Answer 8

It is not impossible, you just demonstrated that it will take 7 years.  You can either start saving now, and have a house in 7 years, or not and keep renting.  7 years really is not that long to wait, and you can do it much faster than that.