What is a Down Payment
What you need to know about down payments for mortgages.
A down payment is money you pay up front as part of the purchase price when you buy a home. It’s money you aren’t borrowing from the lender, or any other source. It’s your cash investment in the purchase.
While there are some home loans that don’t require a down payment from the borrower, most mortgages have a down payment requirement. It’s usually stated as a percentage of the home purchase price, such as 3.5% down or 20% down.
Why do lenders require a down payment?
Lenders must decide if you are a good risk — that is, whether or not you will repay your home loan. When you invest some of your hard-earned money into a home purchase, you’re seen as more likely to make your loan payments. There are other considerations, such as your payment history and debt-to-income ratio, but your down payment is one of the ways lenders decide if you are someone to whom they will lend money.
Is 20% down a requirement? No.
How much is a conventional mortgage down payment?
You may have heard that you must put 20 percent down. This is a myth. While a larger down payment may qualify you for a lower rate and lower your monthly principal and interest payment, it’s not a requirement. It can take years to save that much money, and there are many conventional loan programs that have down payment requirements as low as 3 percent. There are tradeoffs, however. One important thing to know is if you put down less than 20 percent on a conventional mortgage, you will generally have to pay private mortgage insurance (PMI). Usually paid monthly as part of your mortgage, PMI protects the lender if you fail to pay your loan.
How much is a government mortgage down payment?
There are government-backed home loans with low, or no, down payments. FHA loans have a minimum down payment requirement of 3.5 percent and are often a good choice for first-time homebuyers, but you will need to pay both an upfront mortgage insurance premium at closing and monthly mortgage insurance. Two loan programs that don’t require down payments are VA loans and USDA loans. Both have specific borrower requirements, so you’ll need to make sure you (and in the case of USDA, your property) qualify.
Additional down payment considerations
If you have some flexibility and are debating how much to put down on your home purchase, remember that you will have other expenses related to your home. Make sure you’ve budgeted for homeowners insurance and property taxes, as well as homeowners association (HOA) fees, if applicable. In addition, your home will need maintenance and major appliances will wear out. If you don’t have some cash reserves, you may have to rely on credit cards, and that can add an unwanted financial burden.
If you have additional questions about down payments for mortgages, your licensed CrossCountry Mortgage loan officer is here to help. Call or email today for more information about this very important aspect of the home financing equation.
Ways to save for a down payment
- Open a down payment savings account – money market accounts or certificates of deposit will have a higher yield.
- Save all or part of your tax refund.
- Auto-deposit a set dollar amount from every paycheck.
- Deposit earnings from a part-time job.
- Deposit any unexpected funds – commission, bonus, gifts, inheritance.
- Pay down debt.
- Check your budget for expenses you can reduce.