February 26th, 2020 10:01 AM by Jackie A. Graves, President
What is a down payment when you buy a house? A home down payment
is simply the part of a home’s purchase price that you pay up front and
does not come from a mortgage lender via a loan.
Suppose you want to buy a house for $100,000. The seller gets $100,000.
Mortgage lenders often refer to the percentage of the purchase
price that they finance as a loan-to-value, or LTV.
The term LTV is important because that is how lenders describe
the maximum loan they will make.
Sources for your mortgage down payment
There are many ways to come up with a down payment to buy a
home. For repeat buyers who have positive equity, it’s often the proceeds from
the sale of their previous home. Other sources include:
Some down payment sources, however, are not allowed by lenders.
These include loans or gifts from anyone who would benefit from the
transaction, such as the home seller, real estate agent or lender.
Why mortgage lenders require a down payment
Very few mortgage programs allow 100 percent –or zero down–
financing. The reason for requiring a down payment on a home is that down
payments, or money used to pay down the purchase price, reduce the risk to the
lender in several ways:
There are two very specialized government-backed loans that
require no down payment. They are VA loans for servicemembers and veterans and
USDA loans for eligible buyers in rural areas.
Why down payments are good for buyers
If you have never owned a home, saving for a down payment
provides good practice for homeownership. Suppose you currently rent a house
for $800 per month. And that the payment for the home you want to buy would be
$1,200 per month. You can “practice” for homeownership by putting the $400
difference into savings. This accomplishes three things:
Many financial experts agree that having a down payment is a
good sign that you’re ready for homeownership. If you can make the necessary
sacrifices to amass a down payment, then you’ll likely be able to manage
expenses that come with owning a house, including monthly mortgage payments,
maintenance costs and property taxes.
first-time buyers want to know the minimum down payment on a house. That
depends on the mortgage program, the type of property you buy, and the price of
Down payment amount
Monthly principal and interest
Total monthly payment
House price: $167,667
Down payment amount: $5,000
Percent down: 3
Monthly principal and interest: $776.60
Monthly PMI: $149.11
Total monthly payment: $925.71
House price: $200,000
Down payment amount: $20,000
Percent down: 10
Monthly principal and interest: $859.35
Monthly PMI: $66
Total monthly payment: $925.35
Assuming a 4% interest rate. Source: Bankrate.com, Radian
mortgage insurance calculator
first-time buyers, the down payment is their biggest obstacle to homeownership.
That is why they often turn to loans with smaller minimum down payments. Most
of these loans, though, require borrowers to purchase some form of private mortgage
insurance, or PMI. Typically, lenders will require PMI if you put
down less than 20 percent.
mortgage insurance is not a bad thing if it gets you into a home and starts you
on the road to building equity. Consider this: if you save $250 a month, it
will take you more than 12 years to accumulate the $40,000 needed for a 20
percent down payment on a $200,000 house.
down payments range from zero to 20 percent for most types of mortgages.
Some of the
mortgage programs requiring the smallest down payments are government-backed
loans: FHA, VA and USDA.
loans require borrowers to pay for some form of mortgage insurance. With FHA
and USDA loans, it’s called MIP, or Mortgage Insurance Premium. For VA loans,
it’s called a Funding Fee. The insurance covers potential losses suffered by
mortgage lenders when borrowers default. Because insurance protects lenders
from losses, they are willing to allow these low down payments.
be surprised to find that some private mortgage programs also have low down
payment requirements. Most conventional loans have guidelines set by either
Freddie Mac or Fannie Mae. Because these loans must conform to this set of
guidelines, they are called “conforming” loans. To offset the risk of lending
with smaller down payments, conventional lenders require borrowers to purchase
private mortgage insurance, or PMI, when they put less than 20 percent down on
There is a
trade-off between your down payment and credit rating. Larger down payments can
offset (to some extent) a lower credit score. Higher credit scores can offset
(to some extent) a lower down payment. It’s a balancing act.
payments don’t just make it easier for you to get approved for your mortgage.
They allow you to buy more house for the same monthly payment. Here’s an
example of how a larger down payment gets you more house for the same monthly
Kerry each can afford to spend about $925 a month on a house payment, excluding
taxes and homeowners insurance. Kerry has $15,000 more saved for a down payment
and can afford to spend about $32,000 more for a house.
making a larger down payment offers many benefits, it’s not always the right
The size of
your mortgage down payment is obviously a very personal decision. Tools like
mortgage affordability calculators can help you determine the right amount for
you, and so can a trusted mortgage professional. But ultimately the decision
comes down to your desire, your discipline and your resources.
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