How Much of a Down Payment Do I Need for a Home Purchase

For many people who want to buy a property on mortgage, they need to attach great significance to down payment. It is one of the most important factors related to buying a home.  You should some homework about it should be done before turning to your mortgage lender.

How Much is the Minimum Down Payment Allowed?

Different lenders have different requirements on down payment, and various types of mortgage also bear disparate down payment demands. Many who can’t afford to pay much money at present always seek low down payment. Traditional mortgage generally requires a down payment of 5% – 20% of the purchase price, while some other types of mortgage may demand lower or even zero down payment at all. Applicants for the following three types of mortgage can get their loan without paying down payment.

VA Mortgage

If you are currently in army duty or a military veteran, you and your family are eligible to get a VA (Veterans Affairs) mortgage, which is a government-insured loan for military personals.

Rural Housing Loan

For people who want to buy a home in a rural area, they might be qualified for a rural housing mortgage loan, which has many benefits for borrowers, like no down payment and no private mortgage insurance. But one’s annual gross income must not exceed the moderate income limits to apply for such a loan and the area applicable to such loan is determined by the USDA.

FHA Mortgage with Down Payment Assistance Programs

Down payment assistance programs allow the property seller to give 3% of the purchase price as a gift to a 3rd party service. If the seller agrees to participate in such a program, you can use this 3% as down payment, as a result of which, you can get an FHA mortgage without paying any down payment by yourself.

How to Get the Down Payment?

With the high real estate prices today, many people find it hard to afford down payment – if they have to pay – by themselves. Well, if you find your savings is not enough to offset the down payment fund, there are many other resources to obtain the money.

  1. Look into government or private down payment assistance programs which will give you the fund needed. Don’t forget to check other accessible and favorable government programs.
  2. Sell other assets like motorcycles or boats, if you have any.
  3. Borrow or withdraw money from your retirement funds. Some 401-k and 403-k retirement accounts have regulations that allow you to borrow money from them for first-time home purchase, but penalty might be applied to early withdrawal.
  4. Ask parents and relatives for help. The favorable tax laws allow parents to give a certain amount of fund to their children without tax consequences. If you feel ashamed of getting money from family and relatives, you just borrow from them.

One thing you shouldn’t do is to borrow the down payment money from bank or other financial institution, since the high-interest rate will form another heavy burden.

Is Low Down Payment always Good?

One advisable suggestion is that you pay high down payment if you could manage that. More and more borrowers come to realize that low or zero down payment always comes with another sum of disguised cost. For a long-term mortgage, the borrower with low down payment has to pay more in total than those with high down payment.

  • Increased interest rates. A high-interest rate is the main way for lenders to make up for the lack of down payment. Besides, lenders have good reason to assent that people with high down payment are more reliable and more likely to pay off the mortgage in time, while those with low down payment are at a high risk of defaulting on the mortgage, thus they will demand high-interest rate to offset this risk.
  • Private mortgage insurance. Lenders will also make up for the low down payment through requiring the borrowers to pay PMI to protect themselves in case the borrowers can’t pay off the mortgage. Generally, the less your down payment, the more the PMI. This insurance can be canceled once you pay off 20% of the purchase price.