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How should I decide how much of a down payment to put on a home?

Should it be a percentage of my assets? Paying 20% down on the largest house I qualified for would require selling 74% of my liquid assets as of today, which are currently in stocks in my brokerage account. This amount seems high. But it could be considered less high because that same 20% down payment would be 26% of my total assets, meaning retirement accounts + my brokerage. I do not want to consider taking from my retirement accounts. If it helps, the same 20% down is about 87% of my annual pretax income.

Under ideal conditions, I would use the FHA loan to put down as little as possible, to minimize opportunity cost and capital gains taxes. PMI seems worth it vs. those two costs. However, that would increase my monthly payments, making it harder to meet my cash flow goal. I do not want to subsidize someone else's lifestyle if I move before the mortgage is up. Offers below 20% down, whether FHA or not, are more likely to be rejected as well. So putting down less than 20% makes finding a suitable property harder than it already is.

Are there other factors in this decision I have failed to consider? I feel this question is not a duplicate because of different personal and economic factors, specifically the openness to house hacking, and high valuations in real estate and stocks.

Background on my situation:

Goals:

  • Purchase a home to house hack, ideally multifamily.
    • Partial motivation: diversify my investments out of equities. Feel free to question this motivation.
  • If I move out before the mortgage is up, income should cover expenses (neutral cash flow). I need enough cash flow to cover possible future remote management.
    • This means I am OK with paying up to market rent to myself while I live there.
  • Exit strategy is long term ownership, house hacking or remotely.
    • I am not banking on short term appreciation. I do anticipate a degree of long term appreciation.

Progress:

  • Pre-approved for FHA and conventional loans.
  • Started saving for closing costs and down payment.
  • Active home search.

Challenges:

  • A larger down payment makes it easier to achieve neutral cash flow, but incurs greater opportunity cost and capital gains on sold equities.
  • A smaller down payment makes it harder to achieve neutral cash flow, introduces PMI, and makes offers less likely to be accepted.
  • Finding positive cash flow has been nearly impossible. House hacking is the only way it seems within reach, via paying myself below market rent.
  • Stocks and real estate appear overpriced.
  • Mortgage interest rates are going up.

Me:

  • Mid 20s, single, no kids, good career.
  • First time homebuyer, no significantly valuable property assets.
  • All investments are very aggressive with small amounts in gold and bonds.
  • No student loan or other debt.
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    One consideration not mentioned in your question but that should be a material concern is living with a paid roommate who is actually a tenant and complying with various housing regulations generally present in high cost areas. In a lot of places, particularly right now, you can’t just evict someone who isn’t paying, or worse.
    – quid
    Mar 15 at 18:26
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    @quid that happens to be a consideration I am aware of. The area I am looking in has no such temporary regulation. I also trust my planned tenant screening process to reduce the chances of this. But because this is the kind of thing I want others to alert me to, thank you for bringing it up.
    – anonymouse
    Mar 15 at 21:05
  • To the close-voters: Please read this meta post and keep it in mind before issuing a“ primarily opinion-based” close vote. Mar 18 at 17:27

2 Answers 2

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Under ideal conditions, I would use the FHA loan to put down as little as possible, to minimize opportunity cost and capital gains taxes. PMI seems worth it vs. those two costs.

You could potentially put down less with a conventional loan (3% assuming a good credit score). FHA loans don't have PMI, they have FHA mortgage insurance, if you qualify for a conventional loan, I'd go that route as FHA mortgage insurance is stickier than PMI.

Offers below 20% down, whether FHA or not, are more likely to be rejected as well. So putting down less than 20% makes finding a suitable property harder than it already is.

I've never been asked by a seller to disclose the size of my down payment (I've purchased multiple properties with 5% down), but financed vs cash is a common item to disclose up front. If you have solid credit and adequate income/liquid assets you should be able to get a letter from a lender indicating you've been pre-qualified or pre-approved for financing.

Paying 20% down on the largest house I qualified for would require selling 74% of my liquid assets as of today, which are currently in stocks in my brokerage account.

IMO that sounds like too much house, but this piece is truly a matter of opinion. Borrowing near the maximum someone will lend you means that if you move you'd have a harder time buying a new place and keeping the old as a rental unless your income increases significantly or you happen upon extra money and pay down your debt significantly. You also don't know if you will like being a landlord, passive income sounds nice but plenty of small time landlords lose money (even easier to lose money when dealing with remote management).

Personally, I'm not excited about buying more properties right now. I could very well be wrong and the housing market might march ever upward, but I'm also comfortable and not renting. If I were renting and looking to buy a place right now, I'd buy the cheapest place I'm comfortable living in for a while (preferably a townhouse/condo) and plan to turn it into a rental later. I'd probably put 5-10% down.

How should I decide how much of a down payment to put on a home?

There's no one-size fits all, so you decide by weighing a lot of factors as you are doing. 20-25% down is popular for avoiding PMI and getting best interest rates. 3-5% down is good for maximizing leverage, enabling those with small net worth to buy, and/or allowing people to avoid liquidating other assets. Just ensure that you're comfortable with how much you are left with after the down payment in the context of some various scenarios (house price goes up/down x% after closing, you lose your job after closing, home needs $20k in repairs immediately after closing, etc.).

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I am going to focus on one item in your question:

ideally multifamily.

This might force you to get a loan with 20% down. This is because it is not seen as personal residence. Even if the property type doesn't require you to get a loan with 20% down, they may require to live in your portion of the property for a period of time.

Other items:

  • Qualified for FHA and conventional loans.

This does give you some idea of the costs, it isn't as strong as pre-approval. It might also have a problem if the type of property you would be buying is considered an investment property.

A smaller down payment makes it harder to achieve neutral cash flow, introduces PMI, and makes offers less likely to be accepted.

If you don't need a loan, then telling the seller lets them know that you can move quickly. Getting final approval for the mortgage takes time. The seller doesn't care about 5% vs 20%, except that 20% means you might have some more margin in your. But it doesn't change the speed of getting the transaction done.

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  • Regarding multifamily, I've informed all my lenders and they are comfortable with less than 20% down on a multifamily up to 4 units.
    – anonymouse
    Mar 16 at 17:18
  • Regarding pre-approval, I have been pre-approved. I used the wrong word and will update the question. Thank you for pointing that out.
    – anonymouse
    Mar 16 at 17:19

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