The down payment is a percentage of the home’s purchase price you are required to pay prior to closing. Generally, down payments vary from mortgage to mortgage, and buyer to buyer. Home buyers will always have several options available when purchasing a property. It is crucial to stay informed about these options and what down payment percentages are required for each home loan product. A qualified loan officer will ask you questions based on your goals, needs and wants for the property to determine which product would suit you & your family the most.
Traditionally, homebuyers need to put down anywhere between 3-30 percent of the purchase price in order to qualify for financing. Typically, if you have good credit you could get into a nice house with as little as a 5% down payment and with decent rates. However, you will not avoid private mortgage insurance unless you look at a direction that has what’s called Lender Paid Mortgage Insurance. If you spend a larger amount on a down payment such as 20%, you will be paying on a smaller balance and therefore, will have lower monthly payments on the mortgage, avoid paying mortgage insurance, and obtain a lower interest rate.
Down payments can come from a number of sources including gifts from family members, however, lenders will generally want to see at least a portion of the amount come out of pocket (depending on the loan program) – including proof that it’s been sitting in an account for 2+ months prior to submitting the application.
The actual amount of money that you will need for a down payment on a home will depend upon several factors.
These factors include:
- Your past credit history – Lender will take a hard long look at your credit report. Do you have good or bad credit? What is your current FICOScore? Do you have a recent bankruptcy or foreclosure? Do you qualify for a traditional loan program? Many other credit factors come into play that will ultimately determine how much you will need to put down.
- The lender and mortgage product – Mortgage down payment requirements vary from lender to lender. Often the lender and/or loan product you may be able to qualify for is based on your credit history. If you have a larger down payment and good credit, you can normally qualify with a conventional lender. If you have OK, or bad credit, maybe your only options are government lenders like FHA or VA loan programs which I will explain below.
- The type of home you are purchasing – Most single family residential homes in a typical neighborhood qualify for normal financing if you meet the credit, income, and lender guidelines. But, if the property you would like to buy is not your normal run of the mill home, then it may require alternative financing. These type of homes include manufactured homes, mobile homes, second homes, investment homes, rural homes, and properties in need of repair.
- What about first time home buyers? – First-time home buyers have several options of assistance for the down payment expenses through several government programs. This is because first-time home buyers usually can’t afford the average down payment on a home. Some lenders offer 95% financing with a 5% secured loan, or 100% financing for first-time home buyers. Generally, it’s easier to get financing if the borrower does put down at least 10% on the house. Also, keep in mind that certain states and county agencies offer down payment assistance programs for low-moderate income homebuyers.
Now that we have the basics covered, let’s go over some of the current mortgage options available for homebuyers…
Conventional loans are generally the ones that require a 10-20% down payment. Interest rates offered for these loans will generally always be based on the borrower’s credit score and whether or not the property is to be used as their primary residence. Making a down payment of 20% or more usually eliminates the need to purchase private mortgage insurance(PMI), and not having to pay for PMI, lowers your monthly payments.
Low Down Payment Options
There are various home loan programs that require less than 20% down. Some of the most popular in today’s economy are government-backed Federal Housing Administration (FHA), Veterans Administration (VA), and Rural Housing (USDA) home loans. These programs were designed to help folks overcome obstacles such as a large down payment and strict credit requirements to attain homeownership.
Federal Housing Administration (FHA) Loan Programs
Many people believe that the FHA originates loans. In fact, they simply insure loans for lenders to protect from losses. FHA mortgage programs are a popular option in today’s market due to their lenient credit score and down payment requirements. The FHA will insure a mortgage for which the borrower has a credit score of only 580 (in some cases even lower), as long as there’s a reasonable explanation behind the less than perfect score. There are several FHA loan programs to choose from.
FHA eligibility requirements include:
- Traditionally, a minimum down payment of 3.5% of the purchase price is required – gift funds are allowed. Certain lenders may offer FHA loans with only a 0.5% down payment, find out more about this special assistance program here.
- Minimum credit score of 580 (500 is the absolute lowest and is approved on exception only).
- Loans may be approved up to $729,750 in designated high-cost areas such as Los Angeles and New York City.
Department of Veterans Affairs (VA) Loans
The VA mortgage program is the most widely used option for military borrowers nationwide. Backed by the U.S. Department of Veterans Affairs, the VA insures the loans in case of default and is very similar to an FHA loan.
Generally, active duty and honorably discharged Servicemembers are eligible for VA financing – as long as they have a Certificate of Eligibility (COE) from the VA.
Benefits of a VA loan include:
- No down payment required.
- No mortgage insurance is required.
- Bankruptcy and other derogatories do not automatically disqualify applicants.
- Loan amounts can go up to $729,750 in high-cost areas. This is beneficial for military personnel stationed in high-cost areas such as San Diego, Ca.
USDA – Rural Homebuyers
The U.S. Department of Agriculture offers home loans with zero down. Borrowers are qualified based off neighborhood density and total household income. USDA’s Single Family Housing Guaranteed Loan Program is not only available in designated rural areas, but may be used in various U.S. suburbs.
USDA loans offer:
- Home repair costs may be included in the total loan amount – exception only.
- No maximum loan amount.
- Very low mortgage rates, although mortgage insurance will be collected monthly.
Other Low Down Payment Options
FHA, VA, and USDA loans are not the only low down payment options available. Conventional loans (ruled by Fannie Mae and Freddie Mac) allow up to 95% loan-to-value for the purchase of a single-family residence. Gift funds generally are not allowed, the minimum 5% down payment must come from the applicant’s own funds.
What about mortgage insurance?
Many lenders will also require private mortgage insurance (PMI). Mortgage insurance is typically required with any loan when the property owner does not have at least 20% equity in his or her property. Mortgage insurance is an insurance program that protects the lender and allows them to offer the buyer a lower down payment with the mortgage. The problem that lies there is that the money spent for the insurance isn’t going to help to pay off the loan and to achieve necessary equity. But when the 20% mark is reached, the insurance will become obsolete.
You Will Pay More Than the Minimum Down Payment
Many prospective buyers save up just enough money to afford what they believe will be the minimum down payment required. I don’t want to give you false hope or make homeownership seem unrealistic, but you will need to save an additional 1-2% of the purchase price for closing costs. Lenders will also many times want to see cash reserves (total PITIA payments) of 3-6 months after the down payment and closing costs have been paid.
Many home buyers think the down payment is due among the signing of a contract to purchase a home. Is this true? No it is not. Down payments and closing costs are owed at the closing appointment and not before it. What’s due at contract signing is the earnest money, which is the deposit to hold the property. This is credited to the buyer at closing, removing from their down payment and closing costs.
Many people are not aware that there are private lenders that have programs that don’t require a large down payment to secure a mortgage. One reason why most people are not aware of these mortgages is because they are quite difficult to come by. Generally, these deals will have higher standards, requirements, and interest rates.
I’m LoanSafe.org’s mortgage expert and a senior loan officer with Prime Lending. If you need a live rate quote, or need help getting a new mortgage, please call me direct anytime at 619-379-8999.