It was drilled into my head as a kid — if you're going to buy a house, you need to contribute a 20 percent down payment. As an adult, as I pinched pennies and read Dave Ramsey books from cover to cover, I heard similar statements — If you can't put down at least 20 percent on a house, you can't afford it. Even better, pay for your house outright, with cash!
But six months ago, for a variety of reasons, it was time to buy a house — and my husband and I had nowhere near 20 percent for even the most modest dwelling. What we did have saved, we decided, would cover closing costs, moving expenses, and a few pieces of new furniture — a dining table, a recycling bin. Our budget was $120,000 max, and saving up $25,000 would have taken us another several years — time we didn't have.
Historically, putting down 20 percent on a house has been the gold standard. It obliterates the need for private mortgage insurance (PMI) and gives you credibility with the sellers and the lender, according to Forbes.com.
But research shows that 20 percent is uncommon. As of 2013, most consumers average 16 percent. And in some states the average is even lower, hovering around 12 percent. A 20 percent down payment may be the most financially responsible thing to do, but it may also be an unreachable goal for most Americans.
My husband and I decided to forgo the 20 percent down payment during our house-buying process, much to the chagrin of my parents and, I assume, Dave Ramsey. Here's how we're doing it — and how you can, too.
1. Buy a short sale or foreclosure.
On our house-hunting journey, most of the properties we looked at were short sales or bank-owned foreclosures. Short sales take a notoriously long time to process, so it definitely has its downsides. But they’re oftentimes priced well below market value, and the same goes for foreclosures. If you have time to spare, this could work out favorably.
One property we toured, which had been on the market for months, was listed at just $105,000. According to the comparable properties ("comps") our realtor pulled, that house was likely to appraise for much higher — $125,000 or more. Had we bought it, and had it appraised for that amount, we would have had instant equity of almost 20 percent. That means less time paying PMI and a greater chance we could make a profit when we sell in the future.