Down Payment Assistance
Almost all home loans require a down payment, an upfront payment you make to purchase a home (or a vehicle, or another asset). The required down payment is determined by the type of loan you choose, but your financial situation and the type of property you’re buying (whether it’s your primary home, an investment property, etc.) might also play a role in how much you have to put down. Very often this initial payment is not only critical for getting approved, but it can also affect your payments throughout your loan. So, it is wise to pay the down payment even if you are not required to (yes, there are “no down payment loans”) as it helps you minimize borrowing.
There are people who prefer to pay a bigger down payment than required, there are others who prefer a smaller one. Both options have their pros and cons. A big down payment will help you in lower rates, mortgage insurance, smaller monthly burden, future borrowing power, and a potential equity. On the other hand, a smaller down payment can help you buy your home sooner, reserve for emergency, have resources for improvements, or use the saved money on other priorities.
The standard down payment has been 20% of the purchase price, though today it is no longer the industry standard. Still most lenders prefer it. For lenders (banks, credit unions, or non-bank lenders), a down payment helps offset their risk. The bigger your down payment is, the less they end up losing if they foreclose.
You may have heard about the 20% rule - when a 20% down payment is considered ideal. That’s because with a 20% down payment you’ll avoid getting PMI (private mortgage insurance) that insures the mortgage for the lender in the event that the borrower defaults. Although PMI usually costs between 0.5 and 1 percent, it can add up to thousands of dollars and increase your monthly mortgage payments.
But you pay a down payment from your personal savings and if you can’t afford a 20 percent down payment, there are always programs over there, especially for first-time home buyers, that can require as little as 3%! You can check out the FHA (The Federal Housing Administration, a government agency aiming at helping home buyers, especially first timers) or Fannie Mae and Freddie Mac, the government-sponsored companies. All of them have 3% down payments on home loans. Moreover, if you’re an active or retired service member, or live in a rural area, you may be approved for a zero down payment through programs by the Department of Veterans Affairs or the Department of Agriculture’s Rural Development program.
Here are the down payment minimum requirements of the most widely-used purchase mortgage programs:
Conventional Loan (without PMI): 20% minimum down payment - A conventional loan is a mortgage from a private lender without government backing and with a down payment large enough to satisfy the lender's standards. With a 20% minimum down payment, the borrower does not need to pay private mortgage insurance.
Jumbo Loan: 10% downpayment - Jumbo loan is a type of financing that exceeds the limits set by the Federal Housing Finance Agency (FHFA). Some lenders now offer jumbo loan financing for as little as 10% down. Plus, unlike with conforming loans, putting down less than 20% on a jumbo loan doesn’t automatically trigger the need for costly private mortgage insurance.
FHA Loan: 3.5% down payment minimum - When it comes to FHA loans, the traditional, bare-minimum down payment amount is 3.5% of the contract sales price of the home. Though this is the lowest an FHA down payment can go, it is not guaranteed for every borrower. The down payment required by an FHA loan is heavily dependent on the applicant’s unique credit score, the chosen lender and other factors. Applicants with a credit score below 580 will need to make a down payment of at least 10%. The FHA allows down payment funds to come from donations, grants, gifts, private savings clubs, savings bonds, IRAs, 401(K) accounts, investments, and down payment assistance programs.
HomeReady™ Loan: 3% down payment minimum - HomeReady™ can help lower-income home buyers who don’t have a lot to put down with 3% down loan (if they’re buying a one-unit property). The down payment will be 15 percent in case of a two-unit property purchase, or 25 percent down in case of a three- or four-unit property.
Conventional Loan (with PMI): 3% down payment minimum - This type of loan is for you if you want to avoid high FHA costs and permanent mortgage insurance. The 97% LTV program comes with cancellable mortgage insurance and requires a 3% down payment. According to Fannie Mae’s Loan Level Price Adjustment (LLPA) chart, a borrower can have a score as low as 620 and qualify for this loan.
USDA Loan: 0% down payment - USDA home loans are becoming more popular as they are an easier way to buy a home with zero down payment. This mortgage type reduces costs for home buyers in rural and suburban areas. A minimum FICO ® Score of 640 and a household income under the limit set by the USDA for the area where you want to buy a home are required to qualify for this loan.
VA Loan: 0% down payment - The VA loan program provides qualified borrowers the opportunity to avoid down payment fees. Most VA loans do not require a down payment. Though in order to have a VA loan that does not require a down payment, the buyer must not borrow more than the loan limit of the county they live in. Also, for this type of loans consideration is usually required (consideration is a deposit also known as an earnest money deposit which can be refunded if the property transaction is finished (either closed or rescinded). Not a down payment, consideration can be applied to the down-payment if you are required to make one.