The Lowdown on Down Payments
Since the 2008 recession, many changes have occurred in the home buying and mortgage industries, including requirements regarding down payments. All segments of the home mortgage industry have seen significant tightening of lending standards, and, in general, home buyers looking to use a conventional mortgage product can expect to need 10 to 25 percent of the home’s sale price as a down payment. Government loans can still be secured for significantly less money down than conventional loans. However, even down payment and credit history requirements for FHA and VA loans have been altered to the degree that it can impact how much money you can borrow, and at what rate.
Luckily for hopeful buyers, advocates in the home and lending industries, including the Center for Responsible Lending, have sought to even the playing field for credit-worthy buyers who may lack the cash necessary for 20 percent and 10 percent down payments.
Even as federal agencies are seeking to regulate against predatory lending, especially in the sub-prime categories that contributed to the massive economic collapse in 2008, the path to homeownership for most credit-worthy buyers is taking more firm shape.
Housing market up, but cash tougher to come by
National data shows that since October 2011, the U.S. housing market has, overall, shown modest and incremental gains. Prices have moved higher, and demand and consumer confidence have grown. With low mortgage rates, more buyers can now afford to own a home.
Few first-time buyers, however, have the cash on hand to make a down payment, and many homeowners who would like to trade their homes will not net the kind of equity to cover the cost of a 20 percent down payment on a new home. That makes the availability of government loans through the FHA and VA programs attractive options for many buyers.
Down payments for conventional mortgages typically require at least 20 percent down. That holds true for jumbo mortgages, too, which are loans that exceed $417,000.
First-time home buyers enjoy lower minimum down payment requirements. Many prospective new homeowners can get a mortgage with a 3.5 to 5 percent down payment. Prior to the real estate crash, more options existed for no-money-down loans, but most of these have become extinct. Still, a 3.5 percent mortgage down payment helps many more people afford homes.
FHA loan rules require a minimum down payment of 3.5 percent
According to FHA.gov:
“Your down payment can be as low as 3.5 percent of the purchase price, and most of your closing costs and fees can be included in the loan. Available on 1-4 unit properties.”
“Many borrowers find there are additional factors that affect the amount of the down payment. For example, those who do not qualify for the most competitive loan terms may not be able to get the lowest required down payment. Credit issues or other factors may affect the lender’s perception of your credit worthiness. That can affect the terms, rates and down payment you’re qualified for from that particular lender.”
VA mortgage = 0 percent down payment
The VA loan program is available to military borrowers and is insured by the U.S. Department of Veterans Affairs. This program is for active-duty and honorably discharged service personnel as well as those who have spent at least 6 years in the Reserves or National Guard. Spouses of service members killed in the line of duty are also eligible.
This loan program takes into consideration intermittent occupancy, which allows for deployment issues, and it does not automatically disqualify those who have filed for bankruptcy or had other credit issues. No mortgage insurance is required.
One reason that many who apply for conventional loans try to make the 20 percent down payment threshold is to avoid having to take out private mortgage insurance. PMI insures the lender for the amount of loan-to-value above 80 percent. Buyers putting down less than 20 percent pay a monthly PMI premium, which is added to their mortgage payment.
Condos mean more down
Unlike single-family homes, for which buyers can find mortgages that will require as little as 3 or 5 percent down, most condominium purchasers can expect to need at least 10 percent down to secure their loan. Because of the more complicated ownership factors associated with a condominium unit, mortgage lenders tend to perceive these properties as a higher risk than detached, single-family houses.