March 10th, 2014
There is a common misconception that homebuyers must have 20 percent to put down on a home in order to qualify for a mortgage.
What is a Down Payment?
A down payment is a percentage of the home sale price that a lender requires the homebuyer to pay from reserves, rather than finance. Down payments can come from a bank account, a stock fund, an inheritance or a retirement portfolio. In some cases, down payments can also come from a family member in the form of a gift.
Down payment requirements will vary based on your loan, such as whether you are financing a primary home versus a secondary or investment home.
The type of loan product you choose and qualify for will also impact the percentage of your down payment, and there are several options requiring less than 20 percent down.
Conventional Loans: 5 percent
Conventional loans require buyers to put at least 5 percent down, though making a down payment of less than 20 percent will trigger a private mortgage insurance requirement.
In general, the smaller your down payment and lower your credit score, the higher your mortgage insurance rate will be.
FHA Mortgage Loans: 3.5 percent
FHA loans, or government-backed loans, have been popular with buyers since their launch in 1934 because they are more flexible in terms of credit scores and income.
These loans require just a 3.5 percent down payment, making them especially appealing for first time homebuyers.
FHA $100 Down Programs: $100
Available to most U.S. buyers, the FHA features a special “$100 down” loan with accompanying low mortgage rates.
In order to use the $100 down program, buyers must purchase a home that was previously financed with an FHA loan and has since moved into foreclosure. A real estate agent or lender can help identify eligible homes.
VA Mortgage Loans: No Down Payment
The Veterans Administration loan is another government-backed loan that is guaranteed by the Department of Veterans Affairs and requires no down payment or mortgage insurance.
A homebuyer must have served in the U.S. Armed Forces, or have been a member of the National Guard or Reserves to qualify. Spouses of deceased veterans are eligible in some cases as well.
Down Payment for USDA Loans: No Down Payment
The U.S. Department of Agriculture also offers a zero-down payment mortgage.
The USDA’s Rural Housing loan is meant to help people buy property into non-urban areas nationwide. Most modest homes are eligible, and homeowners are generally restricted to a modest income. There is a small mortgage insurance premium associated with USDA loans, which are available in all 50 states.
How much should I put down?
How much you put down will impact how much you finance and ultimately pay each month for your mortgage.
“Conventional wisdom says that the bigger down payment you can make, the better. This results in a smaller monthly payment and less money owned,” Berry explains. “However, wiping out your savings or retirement account to make a big down payment is rarely a wise choice.”