How Much Should a Down Payment for a Mortgage Be?

Saving for a down payment on a mortgage can be a big hurdle, especially on your first home. The amount of money you put down will differ depending on what type of loan you need and other factors like credit. The amount you put down may be directly related to your interest rate, so you may pay more in the long run if you put down a small down payment.

Conventional Mortgage

A traditional 30-year fixed mortgage used to require a 20 percent down payment. This is not necessary in today's market. Most conventional mortgages will require 5 to 10 percent down. However, if you put down less than 20 percent, you will be required to pay private mortgage insurance. PMI is a tool the lender uses to protect itself from losing money. Those with small down payments are a higher risk than those who put down 20 percent. So, the lender insures your loan in order to regain the money in case of default. You will be the one paying the premiums, though. Another option to avoid PMI is a piggyback loan. This also will require a 5 to 10 percent down payment. There will be a first mortgage of 8 percent, and a second mortgage for the remainder. This allows the first mortgage holder not to charge you a PMI. You will ultimately pay more, though, because the second mortgage will have a higher interest rate.

FHA

The Fair Housing Administration offers mortgages with small down payments. They typically ask for only 3 percent of the home loan. These loans are good for first-time home buyers and anyone with little available cash or less-than-strong credit.

VA

The Veteran's Administration offers mortgages up to $417,000 with no money down. If you need a loan higher than $417,000, also known as a jumbo loan, then you will have to put down a down payment only on the money borrowed above the $417,000. These loans are for United States veterans who meet certain requirements.

Hard Money Lenders

Hard money lenders need to see very large down payments. They typically want 35 percent down. These loans are used by people with poor credit or the self-employed. Because there are no real income or credit guidelines, these loans are often risky. That is why such a large amount down is needed. These also are for investors who are buying a home and selling again immediately and will get their cash back right away.

Sub-Prime

There are some adjustable rate mortgages and sub-prime mortgages that require no money down. In exchange, you will receive a high interest rate, which may become unaffordable when it adjusts. These loans are not good for borrowers who are looking to stay in their home long term. These would be appropriate for someone who is moving within a few years or who will be able to refinance in the future.



Minimum Down Payment



The minimum down payment is the lowest amount of money that a lender will allow an individual to pay on the purchase of a house. The minimum down payment will be different for every lender and for every lending program. The amount of the down payment that is made will have a significant impact on the mortgage payment.

In most cases, if the minimum down payment is less than 20 percent of the total value of the house, the buyer will have to pay private mortgage insurance. Private mortgage insurance is designed to limit the risk to the mortgage lender. If you go into default, the mortgage will be reimbursed by the insurance company. 

If you can make a substantial down payment, it will lower your total mortgage payment. Many times, lenders will give you a better interest rate if you make a larger down payment. Coming up with only the minimum down payment will get you the highest interest rate that the mortgage lender has to offer for people with your credit score and income. Therefore, is generally not in your best interest to make a minimum down payment when purchasing a home.



Can you buy a home with no money down?



If you want to buy a home with no money down, there are some options out there for you to look at. Banks do not offer 100 percent financing as often as they used to. However, a few banks still have programs that offer this type of loan. Some government loan programs are designed to provide home ownership with no money down. When you use any of these types of loans, you need to be aware of the financial consequences. You will have no equity in the property, which means that you might be stuck there for a while. You will also have to pay private mortgage insurance on each payment that you make. 

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