The Down Payment
How much do you need for a down payment?
In the past, lenders traditionally required a down payment of at least 20% of the
purchase price of a home. Today, many lenders offer loans with lower down payments. In addition, certain
private and government entities have low down payment programs.
Can you get a low down payment mortgage?
Whether you can obtain a low down payment mortgage will depend on a variety of factors, such as your credit history and the type of mortgage you're applying for.
You may be able to get a Federal Housing Administration (FHA) mortgage with a down
payment of as little as 3.5%. Qualification standards for FHA mortgages are sometimes less stringent than traditional mortgage loans and the terms of these mortgages are generally attractive,
making them ideal for first-time homebuyers. Keep in mind, however, that FHA loans
will require you to pay a mortgage insurance premium.
Department of Veterans Affairs (VA) mortgages are another low down payment option.
VA mortgages are available to qualified veterans and their surviving spouses. VA
mortgage terms are also generally very attractive, and in many cases, little or
no down payment is required.
You may be able to obtain a conventional mortgage with a down payment of less than
20% with the help of private mortgage insurance (PMI). Low down payment mortgages
are somewhat risky for lenders, because they believe you are more likely to default
on a loan in which you have very little invested. For this reason, lenders generally
require PMI if you are borrowing more than 80% of the value of the home you
are purchasing (i.e., your down payment is less than 20%).
If you are concerned about taking on PMI payments, keep in mind that you may not
have to pay PMI forever. You have the right to request that your servicer cancel PMI when you have reached the date when the principal balance of your mortgage is scheduled to fall to 80% of the original value of your home. In addition, your lender is
obligated to cancel your PMI when the principal balance on your loan is scheduled to reach 78% of the original value of your home or once you have reached the midpoint of your loan's amortization schedule,
provided you have a good payment history.
In addition to requiring PMI, lenders sometimes have stricter qualification standards
and offer lower loan limits and higher interest rates if your down payment is less
What about larger down payments?
If you have more than 20% to put down, you may still want to take the time
to weigh your down payment options. With a larger down payment, you will reduce
the amount of your mortgage and thus the amount of interest you will pay. And since
a larger down payment usually means less risk, lenders often offer lower interest
rates and are more lenient toward borrowers who provide larger down payments. Also,
a larger down payment gives you instant equity in your home, which can be accessed
through a home equity loan or home equity line of credit.
Keep in mind, however, that there may be situations where you might not want to
make a large down payment. For example, you may want to keep the money in your emergency
cash reserve. Or, you may want to put the money toward other investment opportunities.
Investing money for a down payment
If you're saving for a down payment, you may be wondering where you should invest
your money. The answer depends on how soon you'll need the money, since the more
time you have, the more risk you may be willing to accept in considering investments.
If you're going to need the down payment within the next few years, you'll probably
want to minimize risk. For many, this means a bank savings account. However, you'll
also want to consider money market deposit accounts as well. Money market deposit accounts are relatively
low-risk, and generally pay slightly higher interest rates than bank savings accounts.