The down payment is the part of the purchase price the buyer pays in cash and does not finance with a mortgage. Down payments are described as a percentage of the home’s selling price. For example, a 15% down payment on a $100,000 home is $15,000.

The type of mortgage determines the minimum down payment needed, usually ranging from 0% to 20%.  The buyer will often have a wide range of options depending on how much he/she wants to invest in the purchase of the home.

Veterans Administration (VA) loans are government insured loans designed to help service people and veterans obtain financing at very reasonable rates and offer financing up to 100% of the home’s value.

USDA loans, similar to VA, are also government loans but instead are designed to help rural areas develop and the folks that chose to buy homes in them.  These loans also offer financing up to 100% of the home’s value.

The Federal Housing Administration (FHA Loans) was created to help middle to lower-income buyers secure home loans. The FHA doesn’t actually lend the money; instead, it only insures the loan. The FHA requires down payments as low as 3.5%. There are guidelines and the buyer’s credit and income are important factors in meeting these requirements.

Conventional Loans (usually financed either through Fannie Mae or Freddie Mac) have the highest minimum down payment of any of the aforementioned options.  These loans require a minimum of 5% or sometimes 10% (depending on credit and income requirements).  Conventional loans are the hardest to qualify and if the down payment is less than 20% the borrower must also qualify for private mortgage insurance.

Although you may not have to put a full 20% down to buy a home, it can sometimes be wise to put down as much as possible (if the funds are available). A down payment demonstrates to a potential lender that you are serious about the purchase. It also creates equity, helps your credit score and often lowers your interest rate. As an added bonus, whatever you put down is money you won’t be paying interest on. If you feel your credit and or income may be deterrents for lenders, save as much as you can toward the down payment and be sure to pay off as much debt as possible to better your chance of approval.  

Next Topic… “Understanding Your Mortgage Payment”