Down Payments

One of the biggest misconceptions about getting a mortgage is that you need to put 20%  down, when in reality, you need far less. In this article, I am going to walk through some specific  types of loans and their down payment requirements, and explain how the down payment affects  your mortgage.  

Let’s start with the most common type of mortgage: a conventional mortgage.  Conventional mortgages have different requirements depending on the type of purchase you are  making. The lowest down payment you can make for a conventional mortgage is 3%; this is for  primary home first-time home buyers. A first-time home buyer is someone who has not owned a  house in the last three years. For non-first-time primary home buyers, the minimum down  payment is 5%. For second home buyers, the minimum down payment is 10%, and for  investment buyers, it is 15%. The reason non-primary home mortgages have higher down  payment requirements is because of the risk involved. If you’re going to default on your  mortgage, are you more likely to stop paying for the home you live in or the home you vacation  in and/or rent out?  

Turning to government mortgages, let’s start with FHA. FHA mortgages can offer  borrowers with less-than-ideal credit some flexibility in getting a mortgage; however, they do  require a slightly higher down payment than conventional loans. For FHA, the minimum down  payment is 3.5%. A note about FHA: it is only for financing primary home purchases. The other  two government-backed loans available both offer 100% financing, meaning no down payment is  required. These are VA and USDA loans. To qualify for a VA loan, you must be a veteran or  active-duty member of the armed forces. To qualify for a USDA loan, you must purchase a home  in a rural area (location guidelines can be found on the USDA website).  

Now that I have laid out the requirements for down payments, I will explain how they  affect your loan. First, let’s start with the obvious: holding all else equal, higher down payment  amounts will result in a lower monthly payment. This is because you will be taking on a smaller  loan amount, and when amortized, it will result in a lower monthly payment than a smaller down  payment would. Another way the down payment amount affects your mortgage is by determining  if you will have to pay monthly mortgage insurance. Mortgage insurance is an added payment to  your monthly mortgage that helps protect the lender in case you default on the loan. Mortgage  insurance differs depending on the type of loan you are getting. For conventional mortgages, any  time you put down less than 20%, you will have to pay mortgage insurance until you build 20%  equity in your home. For FHA, if you put 10% down or less, you will have to pay mortgage  insurance for the life of the loan (until it is paid off or refinanced). If you put more than 10%  down for FHA, mortgage insurance will drop off after 11 years. For VA loans, there is no  mortgage insurance at all. Finally, for USDA loans, there is no mortgage insurance, but there is a  guarantee fee that must be paid regardless of the down payment amount. A note about mortgage  insurance in general: the amount you put down, your credit score, and the loan amount all affect  how much you will pay each month.  

The last way your down payment affects your loan is through the interest rate. Lenders  tend to have interest rate price breaks depending on how much you put down. This means that, in  most cases, holding all else equal, the more you put down, the better the interest rate you will  receive. For primary home purchases, the first major price break is at 20% down. For both  second home and investment property purchases, the first major price break is at 25% down. 

Please note that interest rates are influenced by many factors beyond just the down payment,  including credit score and loan amount.  

In summary, down payments can affect many aspects of your loan, which is why, when  purchasing a home, it is vitally important to consider all of the implications. If you are ever  unsure about the best path forward based on your current situation, never hesitate to ask the loan  officer you’re working with, as they can help advise you on making the best decision.