The biggest obstacle to buying a house for most homebuyers is the down payment.
Many borrowers don’t have the conventional 20% down payment.
However, today there are many types of home loans that offer low and no down payment options.
In this article we will be talking about how much you should to put down on a house for each mortgage type.
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What is a down payment?
A mortgage down payment is the amount of money a consumer pays for their share of the purchase price of a home.
The down payment is a percentage of the purchase price of a house. Lenders will only fund a certain percentage of a home’s value to reduce their risk, know as the loan-to-value ratio.
Why down payments are required for home loans
A down payment is required for most mortgage loans. Research shows that a consumer who has more invested in a home is less likely to default on their loan.
Also, when a borrower puts an amount down, the lender does not have to finance the entire purchase price of the home.
In the event a borrower defaults on the loan the lender will have an equity position on the property.
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Down payment requirements for each type of mortgage
- FHA Loans – 3.5%
- USDA Loans – NO Downpayment
- VA Loans – NO Downpayment
- 203k Loans – 3.5%
- HomeReady™ Loans – 3%
- Conventional Loans – 5%-20%
- Conventional 97 – 3%
- Jumbo Loans – 15%-20%
Where down payments can come from:
- Your savings account
- 401k or IRA assets
- Gift from a relative or close friend
- From a co-borrower or co-signer
How Your Credit Score Affects Your Down Payment with an FHA Loan
FHA home loans offer low down payments and easier guidelines, making them a popular option today.
But your credit score will determine exactly how much of a down payment you need.
If you have at least a 580 credit score you can qualify for an FHA loan with just a 3.5% down payment.
However, if your credit score is below 580 you still may qualify but you’ll need a 10% down payment.
How Your Down Payment Affects Mortgage Insurance
One of the benefits of making a large down payment of at least 20% is that you avoid paying mortgage insurance.
PMI (private mortgage insurance) is required on all mortgages when putting less than 20% down except for VA loans. PMI is paid monthly, the mortgage insurance fee varies from loan to loan. On most mortgages the PMI can be removed once the balance on the loan reaches 78% of the appraised value.
Annual PMI fee for each mortgage loan type
- FHA < 90% LTV = 0.80%
- FHA > 90% LTV = 0.85%
- VA – No PMI
- USDA – 0.35%
- Conventional – 0.50% – 1%
The rate you pay will vary based on different factors. The biggest factor is your loan-to-value ratio, the lower the LTV value the lower your rate will be.
Using gift funds
The entire, or a portion of the down payment funds can be a gift from a friend or family member. FHA and 203k loans allow the entire 3.5% to be a gift. Conventional loans rules on down payment gifts are a little different:
Conventional Loan rules on gift funds
- If more than 20% is put down, all the funds can be a gift
- Only a portion of funds can be a gift if the total down payment is less than 20%. Requirements for amounts will vary based on the lender and loan type.
- Investment properties are not eligible for gift funds
You will need to provide your loan officer with a gift letter for the down payment. This shows that the person gifting the funds does not expect to be repaid. You will need to include the following in the gift letter:
- Donor’s contact information and name
- Property address
- Relationship to the borrower
- Statement showing the donor is not expecting the borrower to repay them
- Amount of money being gifted
- Donor and borrowers signature
First-time Home Buyer Down payment Assistance and Grants
First-time home buyers can choose from any of these great loan programs. The most popular mortgage for first time buyers are FHA Loans because they require a low downpayment.
As a first-time home buyer you may qualify for grants or down payment assistance. Go to the HUD website to search for grants in your state.
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Randall has over 15 years of experience in the mortgage and credit industries. He spends a chunk of time helping consumers understand their credit, advise them on how to increase their credit, and lending his mortgage expertise to help them find the right type of loan. Randall lives in Dallas, Texas with his two sons.