The biggest obstacle to buying a house for most homebuyers is the down payment.
Today, there are many types of home loans that offer low and no down payment options.
In this article, we will take a look at the down payment requirements for each type of mortgage program and where your down payment can come from.
Current Mortgage Rates (December 2020)
What is a Down Payment?
A down payment is a percentage of the purchase price a borrower must pay up-front to buy a home. The down payment is given to the seller, the lender finances the rest of the funds. 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.
For example, if you buy a $200,000 home and the down payment is 10%, the down payment is $20,000.
Down Payment Requirements by Loan Type
3.5% - 10%
No down payment
No down payment
5% - 20%
Conventional 97 Loan
Home Possible Loan
10% - 20%
The requirements for FHA loans are more lenient than any other home loan. FHA requires a 3.5% down payment if you have a 580 credit score or higher. A 10% down payment is needed for borrowers with a 500-579 credit score.
If you’re a Veteran of this country you may qualify for a VA Loan. You can get a VA mortgage with zero down. Not only that, they don’t require mortgage insurance, which saves the buyer thousands a year.
The USDA loan program provides 100% financing to low-income families who purchase homes in rural areas of the county. In order to qualify, your household income cannot exceed 115% of the average income in your area.
Conventional loans typically require a down payment ranging between 5%-20%. A great benefit of using a conventional mortgage loan is that if you put at least 20% down you don’t need PMI.
Home Possible and HomeReady Loans
The Home Possible and HomeReady loan programs are types of conventional loans that require just a 3% down payment. These programs are exclusively for first-time homebuyers whose income does not exceed 100% of the median household income in the area.
Down Payment Assistance Programs and Grants
There are several different types of down payment assistance programs and grants available from various Federal and State agencies.
You can check the HUD website for information on programs available in your state. You should also check your local city or county website for a list of first-time home buyers and down payment assistance programs available in your area.
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Pros and Cons of Using a Large Down Payment
While there are types of home loans that require little or no money down, there are benefits to putting more money down. Remember, the more you put down the lower your monthly payment will be.
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Where Your down payment can come from:
- Your savings account
- 401k or IRA assets
- A gift from a relative or close friend
- From a co-borrower or co-signer
Your Credit Score Affects Your Down Payment
500-579 credit score
10% down payment
580+ credit score
3.5% down payment
FHA home loans offer low down payments and easier guidelines, making them a popular option today.
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.
The Down Payment Affects Mortgage Insurance Rates
If you do not have at least a 20% down payment you will be required to carry mortgage insurance. Private mortgage insurance, or PMI, is insurance protection for the lender in the event a borrower defaults on the loan.
The PMI amount is usually between 0.50% – 1% of the loan amount annually.
For example, a home with a $200,000 mortgage and a PMI rate of 0.50 percent will have an annual insurance premium of $1,000.
A mortgage insurance premium for FHA will be required regardless of how much money you put down. However, the amount of your down payment will affect your MIP rate.
$625,500 Loan Amount and Lower
Life of the loan
Life of the loan
Down Payment Gifts
The entire or a portion of the down payment 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:
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.
First-time Home Buyer Down payment Assistance and Grants
There are first-time homebuyer down payment assistance grants and programs you may qualify for.
Go to the HUD website to search for grants in your state.
Other Costs to Budget For
There are more up-front costs associated with a mortgage besides just the down payment. There are also recurring costs you should budget for as well. Use our home affordability calculator to see how much you can afford including all expenses.
Closing costs are fees charged by a mortgage lender for issuing a loan. The average closing costs come to about 2%-5% of the loan amount.
Most of the time these costs can be rolled into the loan which will increase the amount of the loan and the mortgage payments.
Earlier in this article, we detailed mortgage insurance costs. Unless you’re getting a VA loan or put at least 20% down on a conventional loan you’ll have to pay PMI. Annual PMI can cost between 0.35% – 1% of the loan amount. If getting an FHA loan there is a one-time upfront MIP fee of 1.75% of the loan amount.
Property taxes are paid to your city annually and are a percentage of your assessed property value. The tax rate changes depending on the state and city.
If your neighborhood has a homeowners association there will be an annual fee. HOA fees aren’t more than a few hundred dollars per year.
Why Down Payments are Required
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 home’s entire purchase price.
If a borrower defaults on the loan, the lender will have an equity position on the property.