Down Payment

Down Payment

A down payment is a percentage of the final purchase price of the home. The percentage depends on your loan product.

If the purchase price is $300,000 and the down payment the loan type requires is 5 percent, then the down payment is $15,000.

Overall, requiring a down payment helps lenders manage risk, ensures borrowers are financially committed to the property, and complies with regulatory standards. Lenders typically require a down payment for several reasons,

Risk

A down payment reduces the lender’s risk by ensuring that the borrower has a financial stake in the property. When borrowers invest their own money, they’re less likely to default on the loan because they have something to lose.

Equity

A down payment builds equity in the property right from the start. Equity represents ownership in the home and serves as a buffer against changes in the housing market. It also gives homeowners more options, such as refinancing or taking out a home equity loan.

Loan-to-Value

The down payment reduces the loan amount relative to the value of the property. A lower loan-to-value ratio means less risk for the lender because there’s a smaller amount of money at stake compared to the property’s value.

Regulations

Many lending institutions are subject to regulations and guidelines that require a minimum down payment for certain types of loans. For example, government-backed loans like those insured by the Federal Housing Administration (FHA) or conventional loans purchased by Federal National Mortgage Association (Fannie Mae) often have specific down payment requirements.

Creditworthiness

Saving for a down payment demonstrates the borrower’s ability to manage finances and save money, which can positively impact their creditworthiness in the eyes of the lender.

Private Mortgage Insurance

Making a substantial down payment can help borrowers avoid the need for private mortgage insurance (PMI). PMI is typically required for conventional loans with a down payment of less than 20 percent of the home’s purchase price, adding an additional cost to the borrower’s monthly payments.

Saving for a Down Payment

Saving for a down payment is the number one concern of people interested in buying a home. If you, too, are concerned, there are some government-insured loan products like USDA and FHA that require either no money down or 3 percent down. US veterans can get a VA loan for NO money down. Typical loans, known as conventional loans, require 3 percent or more.

 

Conventional Loans

Conventional loans are offered by banks, credit unions, and other lenders who require a down payment of 3 percent or more. If you are concerned about a down payment for a conventional loan, consider these options,

  • Accept a gift from a family member.
  • Withdraw or borrow the down payment from your retirement plan. Contact your plan administrator to see if that is available to you.
  • Explore your options with a loan officer.

 

VA Loans

If you are eligible, you may get a US Department of Veterans Affairs loan, commonly known as a VA loan. You would not have to make a down payment.

  • Active-duty service members who have served for 90 continuous days are eligible.
  • Veterans are eligible based on when they served.
  • National Guard members are eligible based on when they served.
  • Reserve members are eligible based on when they served.

For more information on your eligibility, visit https://www.va.gov/housing-assistance/home-loans/eligibility/

 

USDA Loans

The US Department of Agriculture (USDA) is a government agency that offers mortgages through approved lenders. If you meet the income and property guidelines, you may qualify for a USDA loan. You would not have to make a down payment.

USDA loans are designed for your low to moderate income families. Income limits adjust annually. To see the income limitations for your area visit here.

Visit the map to see eligible properties. Many suburban homes are there.

 

FHA Loans

The Federal Housing Administration (FHA) is a government entity that offers home loans through approved lenders. An FHA loan requires a down payment of 3.5 percent. Or you can apply to a down payment assistance program.

Since you get a low-down payment, you must pay monthly mortgage insurance. The mortgage insurance premium is added to your total monthly payment.

On a $200,000 home with 3.5 percent down, FHA would charge an insurance premium of 1.75 percent of the total loan amount, or $3,377. This would make your loan amount $203,377. In addition, you pay monthly mortgage insurance. This would add about $140 to your monthly mortgage payment.

Home Possible and Home Ready

There are other loan programs available that require just 3 percent down. Home Possible is a program through Freddie Mac, the Federal Home Loan Mortgage Corporation. Home Ready is a similar program through Fannie Mae, the Federal National Mortgage Association. As the names imply, these are government-sponsored corporations.

Both programs help low-income borrowers. How low is low? The best place to check is by calling us or you can visit Freddie Mac Home Possible or Fannie Mae Home Ready. You must have a credit score of 620 or higher, meet the income limit, and purchase an eligible property.

 

Ways to Pay

Both programs give you lots of ways to reach the 3 percent down. You can get money from friends or family or your employer or a co-borrower who does not have to live at home! If you do not have an official credit score, check to see if you can use rent and utility payments to count as your score.

Just like many government loans, you have to pay mortgage insurance. Home Possible and Home Ready will use the mortgage insurance to pay for the mortgage if you do not. You can cancel the mortgage insurance later if eligible.

Eligible properties are found by entering an address at the websites above or we can check it for you. When you look up an address, you will see the income limit.