20% Down is NOT Always Required to Buy a Home


In a market where prices, salaries, bonuses and the number of people circling on the few available properties are all HIGH, its easy to get caught up in the old myth that you MUST put down 20% to buy a home in San Francisco. It has actually stopped many would-be buyers from owning a home, an is a concept/mindset from generations ago. Many experts, including parents and financial advisors, have stated you must put down 20% in order to have skin in the game and really be serious about buying. In fact, making a large down payment on a home can sometimes put your money more at risk than making a significantly lower down payment.

There are some obvious loan products in the market that allows for lower down payment, including FHA and USDA loans. down payment assistance programs and also piggy back loans (splitting the balance into 2 mortgages). While these may not always be optimal on San Francisco properties, there are surrounding markets in the Bay Area that have a better climate of properties that match with such loans. However, in the city or outside it, there are 3 and 5% down loan options (conventional loan programs) that can make a lot of sense and have attractive financing caveats.

Recently, I was working with a buyer that had struck out on 2 previous offers where he was intending to put down 20%. In a strong market like the one we are in here in the Bay Area, faster appreciation rates can be put to work for you and allow for a lower down payment but also a higher potential sales price point, thus making you more competitive. In the case of my buyer, we looked at a solid 15% down payment program with no PMI and still very good interest rates. This allowed him to come in at a higher price point and finally win his offer. 6 months later, due to appreciation, we are refinancing him as if he had put down 20% in the first place into a more traditional product. He got in, rode some appreciation from the Bay Area market, and let the market make up the difference for him in short time.

In most all cases, there are no differences in costs between loans with less than 20% down and those with. Underwriting guidelines can vary, of course, so its important to be fully pre-underwritten in advance of making any offers with this strategy. Ultimately, it can be to your advantage to look at putting down less than 20%.

  • You leave more cash available to yourself, in the event of something unforeseen or to perhaps make some initial improvements/enhancements to the home right away.

  • You are able to buy sooner. Don’t let the market get away from you, just get IN.

  • You can invest cash elsewhere, where it can actually earn you a better return.

There is the “PMI” argument, on the other side. This is an insurance you will have to pay for not putting down 20% in the first place. Despite all its negative appearance, PMI is actually a good investment. Over the last 5 years, PMI has yielded a 520 percent return to homebuyers that took it on. On average, a buyer taking on PMI (for the short run) has paid out pennies in comparison to what they have netted back in appreciation from a hot real estate market. Definitely some food for thought for Bay Area buyers as we rethink the entire mindset of how much should we be putting down when buying a home.

Arjun Dhingra