Looking into mortgages and wondering what your minimum down payment options are? Our experts break it down, loan by loan.
In Q1 of 2021, for the first time since Q1 of 2020, a majority of mortgage lenders reported flat or loosening standards for all 3 of government, QM Non-Jumbo, and QM Jumbo mortgage loans. This is according to the Federal Reserve’s Senior Loan Officer Opinion Survey on Bank Lending Practices.
In this environment, it makes sense to revisit one of the most commonly misunderstood underwriting standards: the minimum down payment. Most people think that 20% is the minimum down payment to purchase a home, while the truth is that the average down payment on newly purchased homes was just 12% in 2019-2020, averaged across 7% for first-time home buyers and 16% for repeat buyers.
When lenders are concerned about their portfolio performance, such as during an economic shock resulting from a pandemic, the availability of low down payment products shrinks. However, this survey suggests that lenders are overcoming their concerns and it will be easier to find lenders offering products at these minimum down payment targets.
As a reminder, a conventional mortgage is one that’s not guaranteed or insured by the federal government. Most conventional mortgages are “conforming” meaning they meet the requirements to be sold to Fannie Mae or Freddie Mac, the two main government-sponsored enterprises that purchase mortgages from lenders and sell them to investors.
For first-time home buyers, the minimum down payment can be as low as 3%, otherwise, it's typically 5%.
If you are putting down <20%, you will likely be required to obtain private mortgage insurance (PMI). PMI can be paid by the borrower (upfront or monthly); or by the lender. If paid by the lender, it is typically built into the interest rate they charge in order to cover their costs. If paid by the borrower, you can request that it be removed when you reach 20% equity in your home (which can happen through a combination of paying down principal and/or appreciation of the home value). If you pay upfront PMI, you don’t need to worry about getting it cancelled but if you sell the home or refinance early, you won’t get a refund.
Jumbo loans have the highest down payment requirements because they are not insured by the federal government and not eligible for purchase by government sponsored entities. The lenders that hold these loans on their balance sheet typically mitigate their risk by requiring higher down payments. That being said, there are lenders that offer 10% down payment jumbo products, and some even as low as 5% for certain professions such as doctors that have high and steady projected income growth.
For down payments below 20%, lenders will offset their risk through a combination of higher interest rates and/or PMI. They may also establish certain reserve requirements (i.e., 6 – 12 months of housing expenses in liquid savings) and require higher credit scores and stricter debt ratio limits. Even if a lender says that it doesn’t require PMI, you should compare the cost and terms to a 20% down payment version of the product to see how the lender is offsetting the increased risk, i.e., through a higher rate, higher reserves, or stricter underwriting criteria. However, given the overall low mortgage rate environment, interest rates on these products are currently lower than rates on high down payment mortgages were in past years, making it more compelling than ever before to look into low down payment options vs. the alternative of waiting and saving further.
VA loans are only available to veterans, active-duty military members, and their surviving spouses. VA loans have a 0% down payment requirement and do not require mortgage insurance. The VA charges a funding fee to help fund the program. Certain groups (surviving spouses, those on VA disability, and Purple Heart recipients serving in an active-duty capacity) are exempt from paying the funding fee, but most are required to pay it. The funding fee ranges from 1.25% to 3.3% of the loan amount and varies based on how much your down payment is, whether you’re buying a home or refinancing, and which branch you served in.
FHA loans, which are backed by the Federal Housing Administration, offer the ability to get approved with a credit score as low as 580 and a minimum down payment of 3.5%. If your credit score is below 580, the minimum down payment increases to 10.0%. FHA loans carry an upfront Mortgage Insurance Premium of 1.75% regardless of term or LTV. They also carry an annual MIP of 0.45% - 1.05% depending on term, LTV, and loan size. The annual MIP is cancelled after 11 years if the original LTV was less than 90%; otherwise, it is paid for the life of the loan.
Down payment assistance (DPA) helps homebuyers with grants or low-interest loans that reduce the amount they need to save for a down payment. There are more than 2,000 of these programs and they vary by state, county, and city. Down payment assistance programs are typically meant for first-time home buyers. However, a repeat home buyer often counts as a “first-time buyer” if they haven’t owned a home in the past three years.
Almost all DPA programs require you to borrow from an approved lender, participating in an approved mortgage program. You may have to sign up for a particular mortgage product. However, DPA-approved mortgages often include the most popular loan programs.
We recommend either doing a google search based on the area you are looking to buy in; or go to this link, click on your state, click on 'learn about homeownership', and click on 'assistance programs'.
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