In a post published recently, a panel examined some common real estate misconceptions. Seven Forbes Real Estate Council members sought to correct misinformation they say they encounter most frequently—especially from first-time homebuyers. The errant assumptions were especially noteworthy because they deal with a pivotal element in real estate transactions: down payments.
5 Main Myths
Here are five myths the panelists singled out, followed by the panelists’ corrected notions:
• A large down payment is essential. Yesterday’s predominant 20% ‘normal’ has become today’s 6% or less.
• Only the down payment is needed at closing. Other fees are due at closing.
• Down payments are not necessary. In addition to demonstrating financial strength, down payments lower monthly payments and attract better interest rates.
• Cash is always required for a down payment. Not always, other assets can be pledged (such as a stock portfolio).
• You can put down 3%-5%. Yes, but that’s not the whole story. In addition to closing costs, owning your home also involves insurance, utility, and maintenance expenditures.
Setting the Record Straight
There were seven misconceptions in all, including these two, whose “corrections” seem to disagree:
• “A lower down payment makes for a poor offer” was corrected with “one should not feel like their profile is less appealing just because they are taking on greater than 80% financing.”
That would be good news were it not for this:
• “There’s no need to put down more than 20%” brought this correction: “…a large down payment reduces the risk to the seller that an offer will fall out of contract due to a property not appraising at the offer value.”
In all cases, it’s good to remember that the down payment amount affects the degree of risk to the lender, not the seller. The only reason the seller might be concerned is if the offer can’t be financed because the mortgage amount (selling price minus down payment) is higher than the property’s appraisal will support. Putting those last two in the list illustrates how even real estate professionals have different ideas about what factors a seller might use to choose the winner when multiple offers are on the table.