How does a down payment affect a mortgage?
The down payment affects the loan in different ways.
For one thing, a larger down payment means you have a better shot at getting the lowest possible mortgage interest rate. That's because the more equity you hold, the less risky you are as a borrower. Home equity is the portion of the home's value that you own.
Also, if you make a down payment of at least 20%, you can avoid paying for mortgage insurance. Mortgage insurance protects the lender in case you default on your loan. It is usually required when your equity is less than 20%.
Mortgage insurance goes by different names. On conventional loans, it's called private mortgage insurance, or PMI. On an FHA loan, it's called MIP, which stands for mortgage insurance premium. On a conventional loan, you can get rid of PMI: The insurance requirement is automatically canceled once your equity reaches 22%. But the insurance on an FHA loan is required for the entire life of the loan. You'll need to refinance the loan (with at least 20% equity) to remove this additional cost. In other words, you would need to get a new mortgage and use it to pay off the FHA loan, and your new mortgage would need to be for less than 80% of the home's value.
One last thing you should understand is you'll have a hard time getting a mortgage with absolutely no cash in hand. Most mortgage lenders require you to have at least one month's housing payment, and sometimes more, in the bank. In some cases, you might also need cash to cover closing costs other than the down payment. A loan officer will explain the requirements to close on your particular home loan.
How much should you put down on a house?
If you're not sure how much you should pay as a down payment, use our mortgage calculator to play around with the down payment size. Use your credit score to figure out which loan option works best for your situation.
Putting more money down will lower the monthly payment and could also lower the interest rate and other costs. Another factor in your down payment decision should be your own need for access to cash. You might want to keep money aside to cover moving expenses, remodeling, or furniture. If you don't have cash, you might need to finance home renovations or other costs -- adding to your debt.
A third consideration is your timeline. A lower down payment takes less time to save up, so it could get you into homeownership sooner. For some borrowers, that's worth the extra cost.
If you have relatives who can afford to help, they can contribute to your down payment through a down payment gift. There are some rules around how much of your down payment can come from a gift, and who can give a down payment gift. These regulations are different for each loan type. If you're planning to use a gift for part of your down payment, the loan officer is a great source for information.
Minimum down payment requirements
Down payment requirements vary with loans and lenders. According to the National Association of Realtors (NAR), most home buyers make a down payment of less than 20%, and the median down payment size is 12% (half of buyers make a smaller down payment, and half make a larger down payment). Here's a look at the minimum down payment requirements for a few different types of loans.
FHA loan: 3.5% down
An FHA mortgage is insured by the Federal Housing Administration. Most mortgage lenders participate in the FHA loan program. To qualify for an FHA loan with 3.5% down, you need a credit score of at least 580. If your credit score is lower, but above 500, you might qualify if you can make a 10% down payment. Note that lenders set their own credit score requirements and some require a higher credit score even for FHA loans.
In most states, FHA purchase loans require an upfront mortgage insurance premium equal to 1.75% of the loan amount, and annual mortgage insurance of up to 1.05% of the balance owed. The upfront premium would either be an out-of-pocket closing cost or deducted from your loan. The annual cost is calculated once a year, divided by 12, and added to your monthly payment.
VA loan: 0% down
The VA mortgage is a home loan insured by the Department of Veterans Affairs. This loan is for eligible service members, veterans, current and former National Guard and Reserve members, and some spouses.
If you qualify for a VA loan, you don't have to make a down payment at all. VA loans don't require mortgage insurance, but most borrowers pay a funding fee of up to 3.3% of the loan amount. You can pay the fee at closing or roll it into your loan.
USDA loan: 0% down
The USDA mortgage is a home loan insured by the U.S. Department of Agriculture. To qualify for a USDA loan, which does not require any down payment at all, you'll need to meet special qualification criteria. You must be a low-income or moderate-income household (the limits depend on the county where you're buying), the home must be in a qualifying location (usually rural), and the home must serve as your primary residence.
USDA loans don't have mortgage insurance but they do have an upfront loan guarantee fee of up to 3.5% and an annual fee of up to 0.5%. Like FHA loans, the upfront fee is calculated at closing and either paid out of pocket or deducted from your loan. The annual fee is spread out over your monthly payments.
Conventional loan: 3% down
Many lenders offer a low down payment conventional mortgage that is not backed by the federal government. For example, the Freddie Mac Home Possible® mortgage program, the Fannie Mae HomeReady mortgage program, or the Fannie Mae Conventional 97 mortgage loan program. All three are conventional loans that require a down payment of as little as 3%.
Some lenders also create their own special low down payment mortgage programs for qualified applicants. Most low down payment conventional mortgages require mortgage insurance, but not all.
Low down payment mortgage loans
Teachers, firefighters, law enforcement officers, and emergency medical technicians can buy a home with $100 down through the Good Neighbor Next Door Program. The home must be in a designated HUD revitalization area and be listed on HUD's website. The sale price is 50% of the appraised value. If more than one borrower applies to buy a home, the buyer is chosen by a random draw.
Some lenders offer zero down or low down payment mortgages to practicing doctors, dentists, residents, interns, and fellows. Doctor loans are for medical professionals who are new to their job but have high earning potential. The PMI requirement is waived on many doctor loans.
Even if you don't qualify for a 0% down home loan, you might be able to take advantage of grants and special programs designed to help people buy homes. These programs are usually local and typically come with income limitations. The down payment assistance can take the form of a non-repayable grant, or a low-interest, deferred-payment second mortgage. The U.S. Department of Housing and Urban Development is a great resource for information.
You are the only one who can decide what's most important to you. A smaller down payment can get you into a home so you can start building equity, and could free up some of your cash for moving expenses or renovations. Making a bigger down payment can save you money on interest, mortgage insurance, and possibly other costs. Make sure you weigh your options to find the right home loan for you.
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