Why You Don’t Always Need 20% Cash Down to Buy a Home

Date: October 24, 2018

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Real estate experts frequently extol the virtues of making a down payment of at least 20% when buying West Chester and Liberty Township homes for sale. But there are times when it makes sense to put less than 20% down.


In fact, there are several situations where it makes sense.


When you’re trying to conserve a cash cushion


One of the major dilemmas that homebuyers face is a shortage of cash after closing. This is a bigger problem than is usually anticipated prior to closing. Once you close on a West Chester or Liberty Township home for sale, you’ll have other expenses. Some of them will be related to the property itself, but others can be unanticipated expenses.


For example, once you move in, certain repairs may be necessary. They may not happen in the days and weeks after closing, but they frequently turn up shortly after. Other times you find that you need new necessities. This could include an appliance or two, or even some furniture.


The point is, you’ll have additional expenses. Since most people increase their monthly house payment when they buy, cash is already tight. This can make your early days as a homeowner very uncomfortable.


An alternative is to make a minimum down payment on a house and keep as much money in the bank as possible. That will keep you liquid during those crucial early months. And that can prevent a lot of other problems and stresses.


When the house you buy is well below what you can afford


One of the main reasons for putting down at least 20% is to lower the risk of owning West Chester and Liberty Township real estate. But if the house you’re buying is well below what you can afford, it’s already a fairly low risk proposition.


And since you can easily afford the monthly payment, the likelihood of needing to sell diminishes.


When you’re buying in a fast-rising market


Making a large down payment is usually recommended if you’re in a flat or declining housing market. Since prices aren’t rising, you won’t be able to increase your home equity through housing appreciation. A 20% down payment (or more) gives you a comfortable equity cushion.


But if you’re in a housing market that’s seeing values rise quickly – as has been the case here in West Chester and Liberty Township over the last few years – there’s less need to have a large equity position. Since the house can be reasonably expected to increase in value due to market factors, you’ll increase your equity without having to pay extra dollars to make it happen.


You’re in a very strong financial position


Once again, making a large down payment is about lowering the risk of homeownership. But if you’re in a very strong financial position, particularly one where you have a lot of other assets, there isn’t much risk anyway.


Let’s say you’re buying a house for $300,000. If you make a 20% down payment, you’ll need $60,000. If you make a 5% down payment, you’ll only need $15,000.


If you have $100,000 in savings and investments, you may actually be in a lower risk position by making the 5% down payment. That will leave you with $85,000 in savings and investments, compared to just $40,000 if you make the larger 20% down payment.


In a situation like this, the smaller down payment is mostly a convenience.


You’re in a position to make a 20% down payment, but you don’t actually need to. You’re simply preserving more of your savings—which you can use to pay down student loans or other debt, or make alternative investments.


When you absolutely need to buy a house and there’s no other option


Picture this: You and your spouse are living in a cramped one-bedroom apartment—but you’re expecting twins in a few months.


In that situation, your need for housing space is about to increase dramatically—but your living space isn’t.


What to do?


Your situation is about to change dramatically, and you don’t have a lot of options. But you have just enough to make a minimum down payment on a West Chester or Liberty Township home for sale.


In this situation, your housing needs are about to overwhelm your finances. You need more space immediately, but you don’t have time to accumulate a larger down payment. A minimum down payment is the only way you’ll be able to afford to buy a house.


If your finances can accommodate it, you may need to buy a house with the smallest down payment. Naturally, it will go better for you if you’re buying less house than you can afford. And it will be even better if you have rich relatives to turn to if things turn sour!


The Bottom Line


There’s nothing wrong with making a minimum down payment on a house—IF there are offsetting factors. Those factors include having a relatively low monthly payment, plenty of other assets, or rich relatives who are more than willing to help.


When all is said and done, sometimes it does make sense to put less than 20% down on a house.


Interested in learning more about how to gain a foothold in the West Chester or Liberty Township real estate market? Give us a call today!