1 Good Reason to Buy a House With a Small Down Payment

by Christy Bieber | Updated July 19, 2021 - First published on March 9, 2021

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A woman chats with her realtor while standing outside a nice house.

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There are risks to buying a house with a small down payment, but there may be a reason to do it anyway.

If you're buying a home, it's typically a good idea to save up a down payment of at least 20%. There are many reasons why having a 20% down payment is important.

  • You're more likely to qualify for the best interest rates on your mortgage loan.
  • You'll be borrowing less, so payments will be more affordable over time.
  • You reduce the chances of owing more than your home is worth. That can make it difficult, or even impossible, to refinance or move in the future.
  • You'll avoid private mortgage insurance, which is a costly and often unnecessary expense.

But while it's usually a better financial choice to delay your home purchase until you have that 20% down payment, it isn't always the case. In fact, there may be one very good reason you might want to buy a house, even if you can't put that much down.

Here's when a small down payment could pay

Buying a house with a small down payment can make sense. Let's say you believe you can land a good deal on a property that's almost assuredly going to rise in value quickly -- but you don't have enough for a 20% down payment.

I actually faced this scenario years ago when my husband and I bought a home in Florida. Property values had fallen. We were confident things were on the upswing and had found a home on the market for a bit less than its appraised value as a result of a divorce. However, we were only able to make a 10% down payment. We went ahead and, a few years later, sold that house at a profit. This gave us enough money to put down 20% on a larger home that was a better fit.

Of course, this isn't necessarily a situation everyone will find themselves in. And it's risky because you can't be certain of exactly what will happen in the real estate market.

It could have taken many years for property values to recover, for example. Or they could have fallen further. We were OK with the risks because we were content to stay in the house for as long as we needed until we could resell at a profit. And, we knew we wouldn't have to move or refinance to be able to afford the mortgage payments.

Still, there are often situations where property values are more likely than not to go up. And if that's the case, you could lose out on the chance to make a good investment if you wait to buy a home until you have 20% down.

Make sure you understand the risk

You may decide it makes sense to go forward with a smaller down payment so you can start to benefit from appreciation. It's important to avoid taking on an unreasonable risk -- like stretching to buy a house with an adjustable-rate mortgage in hopes you can sell before your payments become unaffordable.

Just be sure you understand the downsides and are confident you can hold onto the house for the long haul. It also helps if you have at least some down payment saved up as well as emergency money in case things go wrong.

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