Myth Busted - You Don't Need a 20% Downpayment!!

Christian: [0:00] Hello, hello, and welcome to another episode of the Awesome in Seattle podcast. This is Christian Awesome, of the Awesome Nossum Group at Wilson Realty Exchange, Inc, and today we're giving you a rundown of the basics of down payments when purchasing a house. There are a ton of myths about this topic that we wanna clear up for those of you, uh, that are looking at potentially buying a house. So but before we get into it, let me introduce my co-host for today's episode, the hardworking, amazing agents of the Awesome Nossum Group. First up, we have the data guru, the one, the only, Mr. Jason Saldarriaga.

Jason: [0:34] You're stuck with me

Christian: [0:38] today. And we have the Seattle native, Ms. Reed Watson.

Reed: [0:41] I'm also stuck with Jason today.

Christian: [0:44] Hi.

Jason: [0:44] Hi.

Christian: [0:45] In the second half of the episode, we're actually gonna bring on Casey Granston of Cross Country Mortgage. He is a lender. He's the one that helps you get a mortgage. We figured it would be smart to bring on someone in that field that actually deals with the down payments and the whole financing process to get their expert opinion on how all this works. So he will be joining us shortly. So let's start by defining what a down payment is. So a down payment is the amount of money that you pay in cash that adds up to, with your loan amount, to the full purchase price of a home. So you have some cash, you get a loan for the rest. The cash part is the down payment. Uh, that part usually comes out of your pocket around two to three days before closing. Closing generally is, you know, three to four weeks after you get your offer accepted. This is not an additional cost. This is a portion of the purchase price that you pay out of your pocket. And there are a lot of myths about down payments, and everyone has strong opinions on how much is a smart amount to put for your down payment towards a house. We will tell you what people are actually doing in the Seattle area, and what we see our clients doing.

Reed: [1:56] Yeah, so I'm sure that most people have heard that you need to put 20% down in order to buy a house. Down payments- Nope.

Jason: [2:06] Nope … Reed: myth busted. You don't need 20% to buy a house in Seattle, and for the last seven years when we've done our home buyer classes around the city, this is one of the biggest takeaways that people always have when they walk out, the realization that they don't actually need 20% of the list price in order to buy a house. And, and they do walk out just in the middle of the class.

Reed: [2:26] So what is a typical down payment in Seattle? The average down payment in Seattle is between 5 and 10%. There are loan programs that range from down payment amounts of 0% to 20% or more as well, but typically you're gonna see around 5 to 10% in the Seattle area.

Jason: [2:45] So I wanna chat really quick about how, a- and maybe a little quick is a, a lie. It'll be- But I do wanna chat about how, um, down payments kind of- Play into whether or not your offer is competitive or not. So as a general rule, the higher your down payment, the more or attractive your offer is to sellers. However, this is a vast oversimplification. So for example, if in- uh, interest rates were so low recently that many buyers who would pay all cash for a home were instead opting to get a loan. Uh, we also saw buyers who had enough money on hand to put 20% or more down, but then opted instead to put less down, um, in order to have more money available to invest in other things or maybe use for renovations. And then there's the whole pre-approval versus pre-underwriting piece of the puzzle. We've spoken at length about this. I think we have 16 podcasts devoted- … to that topic. Um, whether or not your lender is local or not, all of these pieces and so many more help play into the buyer's favor, um, as they help diminish or overcome concerns that the seller might have with, uh, a lower down payment if they're especially comparing multiple offers. So that was a lot, but due to all this complexity, it's, it's obvious that there are a lot of ways that this can pan out Generally speaking, at the end of the day, it's important for buyer's agents to ensure that the listing agent understands the buyer's situation. This is where we come in to play here, uh, and really ex- give a lay of the land. Um, it's just generally not binary. There's a lot of nuance to everybody's situation. Now, in terms of offers, your down payment is disclosed. What you're gonna put down, your, the percentage down, is disclosed in the financing contingency that you submit with your offer. In non-competitive offer situations where you as a buyer might have some negotiating power, and we're seeing this happen more often recently, which is amazing for buyers, um, you'll often present an offer, present an offer that is contingent on financing. So in this case, your down payment is disclosed in that contingency. In competitive situations, uh, uh, we've seen a lot of those re- in the last few years. Uh, the buyer, you generally waive financing, um, in order to make your offer stronger. So even though you're not including the financing contingency in your offer, though, we always include a pre-approval or pre-underwriting letter with your offer, and this is even more true with competitive situations. And in these off- in these letters, your down payment is disclosed. So don't think that because you don't have the financing contingency in your offer or you're not saying your down payment, you can put less down and not w- worry about being frowned upon if you're, uh, competing against somebody with a higher down payment. But going back to what I was saying before, down payment is w- just one aspect of what makes an offer strong in the seller's eyes. Working with a local lender who can explain how strong of a buyer you are can help ease a seller's mind if they are concerned about a lower down payment amount. And this is actually helpful, to be honest, regardless of the competitive nature, whether or not a Because having a lender who knows the local market, is accessible, communicative All of these things just shine a, a positive light on your offer as a buyer, which helps with any negotiation. We're gonna have a lender on in a bit, and you'll see he's very communicative, he's accessible, he knows the lo- local market. That's why we have him on. To wrap all of my spiel up, okay, I just wanna end with the simple fact that the majority of our buyers do not put 20% down. So I don't want y'all thinking that you need to do so- … in order to purchase a home. Mm-hmm. It's just simply not true. I just set, threw a lot at y'all. We have a lot of podcasts that refer to pre-approval versus pre-underwriting. We're talking about down payments today, um, lenders. There's just a lot of aspects and facets to this puzzle, but moral of the story, most people don't put 20% down, and there's a lot more to making an offer, a strong offer, than just your down payment.

Christian: [7:16] Yes. And I know there might be some of you that are going, "Hey, hey, hey, if you don't have a 20% down payment, that means that you have to pay PMI, private mortgage insurance." And yes, that is correct. We're not gonna gloss over that. We will go over that in depth here very shortly, but just wanna let you know, we will go over that in a minute. So logistically, I know I talked about it earlier, generally your down payment isn't actually needed to be sent to the escrow company, which will then be given to the seller once the deal closes, until just, you know, a few days before the closing date. Two to three days sometimes. You can generally, you can either wire it or you can get a cashier's check. You don't wanna be rolling in there with briefcases full of cash. You don't wanna be rolling in there with a standard check. Those things generally won't be accepted by the escrow company. And the escrow company, super quick, is a neutral third party. They deal with handling a lot of things in this transaction. They're kind of the middleman that help dictate who gets paid, how much is due, all these other things. Big, big, big caution. When you are and if you are going to wire funds, you need to be aware that wire fraud is becoming much, much more common than it ever was before. So be super cautious. So a quick tip- If you are going to wire funds, don't call the number in an email or wire it just to the, an email that you received that says, "Here's all the info. Wire the $50,000 or $10,000," or whatever your number is, "To this account. No big deal. Just do what, do what I'm saying." No. Call. Look up the escrow company, call the number on their website that you can tell is legit, and verify that the wiring instructions that were sent to you are the correct ones. Amen. Don't just, don't just use the one sent in an email because- Yeah,

Jason: [9:12] a lot of times those emails say, "Hey, we just, uh, important, you know, we just had to update our wire instructions because of a security breach." And so they make you feel like even safer, you know? Mm-hmm. "Oh, oh, okay, so they, it's in response to-

Christian: [9:28] Yeah … Jason: an issue, so here's the new wire instructions." Uh-uh. That's how they get you. Exactly. Exactly. So please always verify your wiring instructions before you actually wire any funds.

Reed: [9:41] Yep, and that's important to do whether it's a down payment or not. Yep. Anytime you are in my mind.

Christian: [9:46] Mm-hmm.

Reed: [9:47] So one caveat to this discussion is investment homes and second homes. They have their own set of rules when it comes to a down payment. So if you're buying an investment property, which is one that you won't be living in, you need to put 20% or more down for that. The loan programs will require a higher down payment when the loan is intended to be an investment property. This is one of the reasons people purchase a home as a primary residence and live in it for a few years, then turn it into a rental later on, because this method requires less cash out of pocket, and then they can build their rental portfolio as they go from house to house.

Christian: [10:23] Yeah, this is a huge, huge plus to buying a home that, you know, maybe after a year or more- Yes … you intend to rent out and keep. Um, but you're first getting it with your owner-occupied financing, which can be as little as, you know, if you have a VA loan, which is 0% down, or maybe a 3 or 3.5%, or a 5%, or whatever your down payment is. You can then keep the home. You don't have to refinance after you move out and turn it into a rental. You can keep your owner-occupied loan, which is the lowest interest rate and the lowest down payment amount forever, which is amazing.

Reed: [10:59] Yeah. And if you're buying just a second home, kind of a vacation home style property, that also might require a higher down payment as well. But there are some programs that allow for a 10% down payment for a second home.

Christian: [11:11] Yep. All right, let's go over earnest money, because sometimes earnest money and down payments get a little mixed up and so let's, let's clear the air on that. Let's clarify the difference.

Jason: [11:21] I'm so earnest about earnest money. Earnest… Uh, w- so what is earnest money? I- i- in a nutshell, earnest money… H- how many times am I gonna say earnest money?

Christian: [11:30] I know.

Jason: [11:31] Earnest money is a good faith deposit on the property, which signifies to the seller that the buyer is serious about purchasing the home. This isn't just an offer to put the house, uh, take the house off the market for three days or something. E- earnest money is paid two or three days after you get your offer accepted, and it goes towards your down payment. Very important. It is not in addition to your down payment. Typically, earnest money ranges from 1 to 3%. If it's… It, that's a, a, a typical, let's say like 25 to 75 percentiles. Um, if it's a competitive situation, of course, earnest money is l- likely to be more, maybe closer to 5% or even higher. And then again, this counts towards your down payment. It's not a separate cost, and we've spoken about, i- in other podcast episodes, about sometimes this, uh, might be released early and you get fancy, but we're not gonna go down that path today, okay? But you… Earnest money is, uh A part of the, the story here that kind of ties in with down payments.

Christian: [12:41] All right, so we have some frequently asked questions that our clients often pose to us that are a bit more specific. So like I said earlier at the beginning, we decided to bring on a mortgage lender on the show today to help us answer these frequently asked questions. So let's please welcome Casey Granston, regional vice president of CrossCountry Mortgage here in the Northwest. He is gonna answer all of our down payment questions. So first off, Casey, thank you for joining us.

Jason: [13:09] Woohoo. Wow,

Casey: [13:09] wow, wow. Yeah.

Jason: [13:10] That

Christian: [13:12] was Jason, not Casey.

Casey: [13:15] I tried to do it, I just don't do it as good as Jason.

Christian: [13:17] I think,

Jason: [13:19] uh, a- as I was doing it I'm like, "That's not the right sound."

Christian: [13:21] All right, so yeah, thank you, Casey, for taking the time out and for sharing your expertise. First question is, can you just tell people kind of what a typical down payment is for a primary home, basically a home that someone's gonna live in here in the Seattle area?

Casey: [13:36] Yeah. Well, I mean, I think the big myth out there is the 20%, right? Yeah, yeah. That, that's something that's passed down on generation on to generation- Yep … which is just- Mm-hmm … so false, right? Average person is around 5%, right? And that's kind of across the board on a conventional loan. That's, that's what you see. Maybe if you get past the million dollar mark, right, you're probably 10% down. Mm-hmm. 10 to, 10 to 15.

Jason: [13:58] Cool.

Reed: [13:58] One question I get a lot and that we sometimes get at the class as well is, are there first time home buyer programs out there?

Casey: [14:06] There are. You know, there's some zero down payment assistant programs out there for first time home buyers, and then there's some conventional first time home buyer programs, FHA first time home buyer programs. So, you know, sometimes you can put down as little as 3%. You know, it, a lot of this stuff kind of comes into with down payment, is your credit score involved? And, um, you know, if you have a really good credit score, you're getting the best rates. And, uh, first time home buyer programs kind of tend to lead to people that don't have as good as credit, and there's some options for them to get a better rate with lower credit being a first time home buyer.

Reed: [14:38] Yeah, absolutely.

Christian: [14:39] So with some of these first time home buyer programs, am I right in saying that there are some, like, income ceiling, income caps for them?

Casey: [14:48] Yeah. Some of them, yes. And, and it depends on the county that you're in for those first time programs of, like, how much you can make as a total household and stuff like that to qualify for them. I, I would say, like, you know, back in, I think it was, like, 2010, 2012, there was that credit that the government gave you- Mm-hmm … uh, for buying a home. That's no longer here. So there's been whispers that it might come back, but nothing, nothing that's come in that says, "Hey, you're a first time home buyer. We're gonna give you a credit," kind of thing.

Reed: [15:14] When it comes to where people get their down payment funds from, Casey, can they get gifts from their families and/or pull it from HELOCs on their current homes?

Casey: [15:27] Yeah, I mean, you know, there's so many different ways to get it for your down payment, right? So we see a lot of gifts from, you know, family. It has to be at least a cousin, um, but, um, you know, blood, all that kind of things. And then if you do have a HELOC set up on your current house, there you can use that. Um, I think the most underutilized one is a 401.

Reed: [15:48] Oh, wow.

Casey: [15:48] Right?

Reed: [15:49] Yeah.

Casey: [15:49] So where people don't have the down payment, don't have the 3%, 5%, and they're like, "Oh, I c- I c- you know, I need 20, I can't have it," you know, you're essentially just borrowing from yourself to- Right go buy a home, right? And so I think that's one of the most underutilized things that ev- you know, pretty much everybody has a 401, right? And so that's a great way to tap into getting a home. You know, that you're, again, like I said, you're borrowing from yourself. And so, um, the only thing that you can't use is, like, unsecured stuff, so, like credit cards, you know, a, a personal loan from the bank, that kind of stuff. Right. It has to be secured to something to be able to use for a down payment.

Reed: [16:23] Okay. That makes sense. Thank you. And just a reminder to the listeners, a HELOC is a home equity line of credit, and if you want to know more about that, check out episode 50, HELOCs Explained.

Casey: [16:33] Hmm.

Reed: [16:34] So Casey, how do you help somebody to determine if they should cash out investments for a down payment?

Casey: [16:41] Yeah, I mean, again, when we get an application or even in our pre-consult with a client, we're gonna go through their kind of whole, um, you know, profile, if you will, right? So what their income is, what their, uh, portfolio is, what their- Mm-hmm … structure is, these kind of things. This, the, it gets, we can kind of go into this whole separate thing of, like, w- how we're gonna, you know, help analyze someone's, um, you know, profile to make sure that this works best for them.

Reed: [17:06] Mm-hmm.

Casey: [17:06] But right, you know, where rates have been and rates are, you know, all-time lows and even, you know, 5, 6, 7% or whatever like that is, the market, right, is, you know, typically is 8 to 10% growth in, in the stock market. So if we can put less down- And have that money stay in those accounts and make more money for you. You're actually gonna be, you know, gaining economic wealth and gaining these kind of things and for the future of not only you, but your family and stuff like that. Mm-hmm. And so that's something that we're gonna look at. We're gonna say, "Hey, like, you know, do you have a financial advisor? Do you have these kind of things to, um, you know, maybe put less down?" You don't, you don't wanna put all your equity into your house or- Right … your cash into your house and not have money work for you. So you, you kind of look at both of, you know, how much can they afford, what they're comfortable with, and then, you know, looking at the, what their financial assets are and stuff like that to kind of put the whole package together- Mm-hmm if that makes sense.

Reed: [18:01] Yeah, absolutely. And if they should choose to cash out on an investment for the down payment, then how far in advance do buyers need to cash out for certain investments?

Casey: [18:12] Yeah, I mean, it, you know, again, say a typical loan is a 30-day close, right? Mm-hmm. And so we wanna get through underwriting, be there, and so we usually say 10 days before closing, right? Okay. That gives us enough time to watch the, you know, transaction flow, that it's left your account, document all that stuff for underwriting. Anything, you know, less than that, we're just kind of cutting it close, and we don't want a, a, a tight close and add more stress to the buyers.

Reed: [18:37] Right.

Jason: [18:38] Nobody wants that, yeah. Casey, can you explain PMI? You know, when it comes into play, how much of an extra expense it generally is, that sort of thing.

Casey: [18:47] Yeah. So PMI, private mortgage insurance is, is essentially an insurance that, you know, you're, you're paying for because you're not putting 20% down. It protects the lender, right? And so depending on the loan program, you know, FHA, you know, typically it's aro- around 1% of your loan amount is what your mortgage insurance is gonna be. Um, that's gonna stay on for about 10 years of the loan at least. Um, you know, at least in, in today's guidelines they are. You know, so it's really hard to get MI off on, on an FHA mortgage even if you get to 80%. Why we do a lot of conventional loans, especially in this market, is if you have really good credit, you know, uh, above 700, 720, 740, that MI gets percentage, you know, .2, .3 around there is if you have good credit. And so your mortgage insurance might be $150, $200 a month on, you know, say 6, $700,000 home by put it, with putting just 5% down.

Jason: [19:42] Gotcha … Casey: right? And so it's not a lot. And so that's the other thing we kind of talk about, you know, the economic data of, you know, their profile and these kind of things. Hey, if you're only paying $100 a month in mortgage insurance, and that money is gonna make more money else- you know, make more elsewhere, hey, it might make sense to put less down. Mm-hmm. And so that's kind of the full conversation we have there, too. And then how does it get removed? Is it once you hit 20% equity or- I mean, that's- … is it automatic? What does that look like?

Casey: [20:10] Yeah, I mean, that's a great ballpark for it, right? Once you get around 80%, um, and that could be, you know, just paying the mortgage down, that could be with equity gain. It's reach out to your lender, right? Mm-hmm. Reach out to who's your servicer and say, "Hey, how can I get this done?" Because each servicer does it a little differently of, of getting it removed, how it's done, but that's usually the best, the best part, is to reach out to them. Gotcha. They're not g- they're not gonna do it at the snap of the finger. Obviously they want all your money, so, so they're, yeah. So just reach out to your servicer or lender.

Jason: [20:40] Sweet.

Christian: [20:41] Yep, and when that servicer says, "Yeah, I don't know if your, if your home is valued at that amount or not, if you have that 20% equity or, or not," you can always reach out to us as your agents, and we can kind of pull some comps, and we can look at some automated values as well. I'm sure the bank has their own, and we can give you- Yeah … a better sense of, "Hey, is this worth pursuing right now, or do you need to wait some more time because you're not quite at that 20% equity yet?"

Casey: [21:05] Yep, yeah. I mean, again, I think that's where you guys add so, so much value to them, is, like, letting them know and giving those, those comps. And then that's like, "Hey, we either need to refinance it off or, uh, get an appraisal, or we can just remove it because there's enough equity." So there's a couple different options that, that we do, but everyone's a little different.

Jason: [21:23] Yep.

Christian: [21:23] So what do different down payment amounts do to change a buyer's monthly payment, and how do you help them figure out how much they should put down? I know we kind of touched on this, but I know that you guys are a little different, where you really do help them and kind of work one-on-one with them, because every person's situation is different and, and pretty unique.

Casey: [21:44] Yeah. So I mean, again, on, on the down payment stuff, the, y- you know, usually when this comes in, after we kind of, like, figure out, okay, here, here's our monthly payment that we want, here, here's where we want to be, and you start looking at, say, 600 to a million, you know- Um, homes, right? Homes worth a million, 600,000, right? When you look at about $25,000 more in down payment or going higher in mortgage price, it's about 100 to $150 monthly, right? And so when you're competing or these kind of things, it's, it's knowing, hey, every, say, you know, 100,000 is, could be anywhere from, you know, 4 to $600 monthly, right? And when you kinda think about, like, what we kinda try to explain to somebody is, like, "Hey, we're looking at a house at, say, 850,000, and we need to go to 875 to win," or you guys do the, you know, cost comparison and, um, you know, your, your CMAs and, and these kind of things, and you're like, "Hey, you guys need to be 875," right? I- that 25 grand is about 100 to $150. $25,000 is a, is a lot of money, but when you look at it in kind of the broader picture of 850,000, it's not as much. Mm-hmm. And so it's kinda giving… You, you wanna give the buyers the most education piece there so they understand of going up that level is not as big of a difference as they think.

Christian: [23:06] All right, Casey, is there anything else that you feel people need to know, or maybe some common questions, questions that you get asked a lot that we did not cover yet?

Casey: [23:15] Yeah. I mean, on the down payment thing, I mean, the thing with this is everyone's different. Mm-hmm. So, you know, sitting down with you guys first to kinda figure out ballpark, then coming to a, to a lender to figure out, okay, hey, here's the payment I'm comfortable with, right? It's usually a lot lower than what people can qualify for, right? It's, it's a- It's kind of a made-up number that they have in their head. Again, it's, it's a round number, right? And so it's us educating them, "Hey, here's where you can actually go, and here's where you can, you know, here's this payment, but here's your max qualifying, and here's your options for these kind of things." So I think it's just really getting educated on it instead of going to a lender that's just gonna say, "Oh, awesome. We'll put you at 3,500," when, well, you can qualify for 5,000 or 5,500 and, you know, or, or X, Y, Z. I think it's just getting as much information, as much education as you possibly can so you can make the best decision when you go buy a home. Your big- gonna be your biggest investment that you can. And working with, you know, the Nossum & Nossum Group, um, us or any other lender, like, it's can you get the education piece from, from people that you want so you can make the best informed decision? And I think that's just, it's so overlooked in our industry.

Jason: [24:26] Mm-hmm.

Casey: [24:27] Mm-hmm. People just don't do it, and they just kinda, they take it for what it is and they g- they just go to some lender and, and, and they kinda take their direction instead of kinda walking through the whole, the whole thing, if you will.

Christian: [24:39] Yeah, and that's exactly why we do our monthly Beers and Home Buying class. You can always sign up for those. They're totally free. They're only an hour-long class. There is free beer, uh, so you have to be at least 21 years old. Um, but you can sign up at beersandhomebuying.com (opens in a new tab). We have them all over the city, the surrounding neighborhoods, even in the suburbs. We go all over the place. So every month, we have a home buyer class, other than December. Some months we have two. So yeah, feel free to sign up for one of those classes. Go to beersandhomebuying.com (opens in a new tab) to see where we are next month. And you can also… One of our first steps after you attend the class and really get a big-picture overview of how the home buying process works and if it makes sense for you, that's when you sign up for a strategy session, and a strategy session is just a one-on-one consultation with us. We do it over Zoom. It's super laid back, doesn't cost you anything. It doesn't obligate you to buy or even use us or anything like that. It's literally just a conversation where we help you answer the questions that you have, and we love to have Casey and his team on to help answer those questions and to help you understand, you know, hey, I only wanna spend $3,000 a month max, or whatever your max is, $4,000. It doesn't matter. Whatever your number is, they can help work backwards and say, "Cool. Well, based on your entire situation, your personalized situation, here is how much your max purchase price should be for a home." So they help work backwards from there to really help you understand what makes sense for you so you do not g- become house poor. We do not wanna see you become house poor. We want you to be successful at this. So, um, thank you so much for your time today, Casey. You were great. I hope, uh, if anyone has any further questions or wants to potentially chat and work with Casey on getting a home loan, what is the best way they can reach out to you?

Casey: [26:37] Yeah. Um, well first off, if, you know, Christian and his team on those first-time home buyer classes are amazing. There is so much information there. Like, I learn something every time I go. So if you are interested, you guys 100% should sign up because it is such a great way to start the process. Um, that being said, the best way to get ahold of me is just, uh, my cellphone. It, you know, 206-953-9211. You can find me, Google Casey Granston. You know, you can find, find me on the internet as well. So, uh- Yeah … pretty easy.

Christian: [27:08] Well, thank you again, uh, Casey, thank you Jason, thank you Reed for all of your knowledge today, and that's it for this episode of the Awesome in Seattle podcast. We will see you next time.