How Much Down Payment Is Required for a Mortgage?
The down payment can be the biggest hurdle to buying a home.
Mortgage lenders typically are willing to lend 80 to 97 percent of a property’s value, so you’ll need a down payment between 3 and 20 percent. You need a bigger down payment if you have poor credit or do not want to pay private mortgage insurance. Military personnel and low-income rural home buyers may qualify for a government-backed program with no down payment at all.
Borrowers can qualify for a mortgage insured by the Federal Housing Administration with just a 3.5 percent down payment, which is $10,500 up front for a $300,000 home. The drawback is that you have to pay mortgage insurance – a onetime payment at closing equivalent to 1.75 percent of your loan amount and an annual payment of 0.85 percent of the loan balance. You can refinance to remove MIP payments after you have 20 percent equity in your home. There’s a qualifying credit score of 580. If your credit score is lower than that, you need to put 10 percent down.
Veterans Affairs Mortgages
If you’re an eligible veteran or active member of the military, the VA will finance 100 percent your mortgage. You don’t have to put anything down. There’s a funding fee that averages around 2.15 percent of the loan amount, but you can roll this into the loan so there’s nothing to pay up front. There’s no minimum credit score, although some lenders have their own standard, and no mortgage insurance. This can knock about $100 or more off your monthly payment compared to other types of loans.
Department of Agriculture Loans
The USDA promotes home ownership in rural areas by offering zero down payment loans to first-time home buyers who are buying a property in a rural area. Like the VA mortgage, there’s no mortgage insurance, but you have to pay a 2 percent funding fee if your down payment is less than 20 percent. There are strict income criteria because the program is only available to buyers who make less than 115 percent of the area’s median income. Rural communities around the Bay Area qualify for USDA funding. Check the eligibility map on the USDA website to find your location.
The HomeReady and Home Possible Advantage programs from Fannie Mae and Freddie Mac require a 3 percent down payment, although you can choose to put more down. Anything below a 20 percent down payment requires private mortgage insurance of around 0.5 percent of the loan balance. On a $300,000 mortgage, that’s an extra $150 each month. It is more difficult to qualify for a conventional mortgage because you need a minimum 620 credit score and a debt-to-income ratio – the amount of your monthly outgoings compared to your monthly income – of around 36 percent in most cases. The FHA requires a debt-to-income of 43 percent.
Reasons to Save a Bigger Down Payment
It may sound obvious, but the bigger your down payment, the smaller your loan will be – and smaller loans equal smaller monthly payments. All lenders carry out affordability checks to make sure you can afford the monthly payments based on your income and obligations. If you only make a small down payment, there’s a risk that you might fail these checks because you’ll need to spend more on your mortgage payments each month. Saving a larger down payment makes you less risky for mortgage lenders. As a result, they usually offer better rates to buyers with large down payments.
About the Author
A former real estate lawyer, Jayne Thompson writes about law, business and corporate communications, drawing on 17 years’ experience in the legal sector. She holds a Bachelor of Laws from the University of Birmingham and a Masters in International Law from the University of East London.