Deciding on the Ideal Down Payment for Your Home


Word on the homebuyers’ street is that you need to put 20 percent down in order to be approved for a mortgage. Nowadays, however, that is not always the case. There are instances in which your down payment can be much less than that, and you’ll still be approved. On the other side of the coin, there are also situations where more than a 20 percent down payment would be most beneficial.

Putting Less Than 20 Percent Down

The idea that one must put 20 percent down to be approved is a blatant myth. Potential buyers with lower credit scores and less income still have options. There are at least four types of loans that will allow a smaller down payment, including some that don’t require money down at all:

FHA Loans

These are the best-known housing loans, aside from conventional mortgages, especially when it comes to first-time homebuyers.

Word on the homebuyers’ street is that you need to put 20 percent down in order to be approved for a mortgage. Nowadays, however, that is not always the case.“The [Federal Housing Administration] has long backed loans with down payments as low as 3.5 percent. It accepts buyers with lower credit scores and those with thinner credit records,” says personal finance and real estate writer Teresa Mears in U.S. News & World Report.

Conventional Loans

Fannie Mae and Freddie Mac do, in fact, back loans with down payments at 3 percent and above. You will, however, need better credit to be approved for this type of loan, but in the end it will be cheaper than an FHA loan.

U.S. Department of Veterans Affairs

Get a VA loan with 0 percent down. You still must qualify for this program based on income and credit, but if you have served in the military, you are already halfway toward approval. Additional fees do apply, however, though they are smaller than the fees with the above loans and can be waived if you have a service-related disability.

U.S. Department of Agriculture

“The USDA guarantees loans with nothing down in rural and suburban areas to those who meet income and other qualifications, and the rates are often lower than those of conventional loans,” Mears says. There is a monthly fee with a USDA loan, as well as an upfront mortgage insurance premium (MIP), but the program is still another solid option.

The downside with most of these is that you are required to pay private mortgage insurance (PMI) due to the fact that, with a smaller down payment, the lender is taking a bigger risk on approving your mortgage. On the other hand, MIPs and PMI can typically be financed, and they don’t last forever.

“When your loan-to-value ratio is 80 percent, you can ask the lender if you can stop paying PMI; at 78 percent, the lender is required to cancel it,” says U.S. News Money contributor Geoff Williams.

Putting 20 Percent or More Down

Of course, putting 20 percent down is not a bad idea if you can afford it. There are many benefits to doing so, according to NerdWallet:

  • Better chance of getting approved
  • Better mortgage interest rate
  • Lower upfront fees
  • Lower ongoing fees
  • More equity in your home right away
  • Lower monthly payment
  • No PMI or MIP

Paying more than 20 percent down is also an option. According to Trulia.com, $417,000 is the cutoff point where a mortgage qualifies as a jumbo loan, and with jumbo loans, the break point is typically 25 percent. That means that paying 25 percent down on a loan at that price point or above will indeed get you a better interest rate.

In conclusion, put down as much as you can afford. Just be sure not to put yourself in the position to have to take money from what you’ll need for closing costs, necessary repairs and general emergencies. Paying as much as you can (within reason) will maximize the benefits and minimize the disadvantages of whatever amount you choose to put as your down payment.

 

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